SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------
FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED NOVEMBER 25, 1994
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____ TO ____
COMMISSION FILE NUMBER: 33-6885
ADOBE SYSTEMS INCORPORATED
(Exact name of registrant as specified in its charter)
California 77-0019522
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1585 Charleston Road, Mountain View, California 94043-1225
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (415) 961-4400
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
---- ----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K. [ ]
The aggregate market value of the common stock held by non-affliates of the
registrant as of December 30, 1994 was $1,829,275,497.
The number of shares outstanding of the registrant's common stock as of December
30, 1994 was 61,488,252.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement dated February 28, 1995 to be
delivered to shareholders in connection with the Notice of Annual Meeting of
Shareholders to be held on April 5, 1995 are incorporated by reference into Part
II.
TABLE OF CONTENTS
Page No.
PART I
Item 1. Business 4
Item 2. Properties 19
Item 3. Legal Proceedings 20
Item 4. Submission of Matters to a Vote of Security Holders 21
PART II
Item 5. Market for Registrant's Common Stock and Related
Shareholder Matters 22
Item 6. Selected Financial Data 23
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 24
Item 8. Financial Statements and Supplementary Data 37
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure 38
PART III
Item 10. Directors and Executive Officers of the Registrant 39
Item 11. Executive Compensation 41
Item 12. Security Ownership of Certain Beneficial Owners and
Management 42
Item 13. Certain Relationships and Related Transactions 43
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K 44
2
TABLE OF CONTENTS
(CONTINUED)
Page No.
Signatures 53
Summary of Trademarks 55
Financial Statements 56
Financial Statement Schedule 96
Exhibits 98
3
PART I
ITEM 1. BUSINESS
BUSINESS OVERVIEW
Adobe Systems (the "Company" or "Adobe"), established in 1982, is a California
corporation that creates computer software solutions to help people throughout
the world effectively communicate information and ideas. It first developed the
PostScript page description language, a powerful, high-level computer language
that communicates precise descriptions of computer-generated graphics, photos
and text to any output device with a PostScript interpreter. Over time, the
PostScript language has become an industry standard for printing electronic
documents. Concurrently, independent software vendors and Adobe used the power
and flexibility of the PostScript language to build a base of application
products that is generally recognized for facilitating the desktop publishing
revolution. More than 5,000 applications support PostScript language output.
These applications are available for every major computer operating system and
hardware configuration, from desktop PCs to mainframes.
Adobe delivers its products and technologies through two divisions: the System
Products Division (SPD), which develops technology for information distribution,
and the Application Products Division (APD), which develops packaged
applications for information authoring.
SPD focuses on the development, marketing, sales and support of system-level
software tools and technologies that are embedded within the branded products of
original equipment manufacturers (OEMs). The division is organized into five
product groups: prepress products, information products, display products,
imaging systems products and printer products.
APD provides three categories of software products: graphics and video, print
publishing and consumer products. Graphics and video include digital imaging and
video products, illustration products, type products and presentation products.
Print publishing products include page assembly products and some accessory
products. Consumer products are personal publishing and productivity software.
Adobe is now leveraging its leadership position in desktop publishing to pioneer
an industry transition to digital publishing. At the heart of this initiative is
technology for the representation of digital documents that are independent of
computer platform, application software and fonts. This technology is embodied
in the Adobe Acrobat family of document communication products introduced in
1993. Version 2.0, which includes a significant number of new features and
expanded capabilities, was introduced in 1994. In addition, Adobe offers an
expanding suite of software tools for authoring multimedia digital information.
Adobe develops, markets and supports its computer software products through
various channels, including distribution through the retail channel, value-added
resellers (VARs)
4
and direct OEM licenses. Additionally, Adobe supports its worldwide OEMs,
distributors and end-user customers through several international subsidiaries.
The European operations are headquartered in Edinburgh, with European offices in
Amersfoot, London, Milan, Munich, Paris and Stockholm. Offices in Tokyo and
Sydney service the Asian and Pacific Rim markets.
APD also markets products through the Image Club Graphics, Incorporated ("Image
Club") subsidiary, a developer and catalog marketer of content software. Image
Club provides original clip art, brand name and original display fonts, stock
photographic images plus a variety of third-party desktop publishing products.
It has a monthly catalog circulation of more than 600,000.
On August 31, 1994, Adobe completed its acquisition of Aldus Corporation
following approval by shareholders of both companies and the Federal Trade
Commission (FTC). The FTC approved the acquisition after Adobe agreed to the
condition that the rights to the Aldus FreeHand program revert to Altsys
Corporation in January 1995. The acquisition was accounted for as a pooling of
interests and qualified as a tax-free reorganization.
5
SYSTEM PRODUCTS DIVISION
PRINCIPAL PRODUCTS
Adobe develops, markets, licenses and supports its printer software, Acrobat
software, prepress software and controller and complementary technologies to
systems integrators, developers and OEMs of computers, printers, imagesetters
and film recorders for incorporation into their products. Core products and
technologies include PostScript, Adobe Acrobat, personal printing software, a
variety of prepress products, the Configurable PostScript Interpreter (CPSI) for
embedded control and host-based printing, the Display PostScript system, Adobe
typeface software, Adobe Type Manager software, application-specific integrated
circuits (ASICs) and other related technologies.
SPD is organized into five product groups: printer products, imaging systems
products, display products, prepress products and information products.
PRINTER PRODUCTS
PostScript is a page description language, a set of instructions typically
generated by a software application that describes the electronic appearance of
a page for a printer or output device containing a PostScript interpreter. The
description includes detailed information such as the placement of each type
character, line, curve or image. In 1990, the Company introduced PostScript
Level 2, which increases functionality in areas such as composite fonts, device-
independent color, data compression and improved fidelity between displays and
output devices.
Adobe also provides PostScript Fax technology to enable printers or other output
devices to receive high-quality standard fax documents on plain paper from any
fax machine. PostScript Fax printers can serve as remote printers and can both
send and receive documents created from any of the more than 20 million fax
machines and modems installed worldwide.
The Company offers a cooperative development program to license PostScript
software source-code interface modules and development and testing tools to
qualified OEMs. This enables them to develop product lines, shorten development
cycles, and add value to their products. During 1993 and 1994, the Company
expanded its cooperative development program to encompass more than a dozen of
its OEMs, each with one or more active development projects. Adobe has also
authorized certain third-party companies to produce products for Adobe's OEMs.
In October 1994, Adobe acquired LaserTools Corporation ("LaserTools") of
Emeryville, California, a provider of printing-related technologies for the PC
environment. In recent years, LaserTools had licensed technologies to Adobe,
including automatic printer language detection software. The acquisition added
complementary technology to Adobe's PostScript software and other areas of its
product line. LaserTools' retail products division was not a part of the
acquisition.
6
IMAGING SYSTEMS PRODUCTS
The Configurable PostScript Interpreter is a fully functional PostScript
interpreter that resides on the host computer system rather than in a dedicated
controller integrated into an output device. The configuration flexibility of
CPSI allows OEMs and software developers to create and market a variety of
PostScript products independently of controller hardware development.
DISPLAY PRODUCTS
The Display PostScript Level 2 system is a standard printing and imaging model
for UNIX workstations. It provides application developers with a way to describe
pages the same way for the display and printer for faster development of
graphically sophisticated applications. It incorporates the same industry-
standard imaging model and language used in PostScript output devices into
products from vendors including Digital Equipment, IBM, Network Computing
Devices, NeXT, Silicon Graphics and Sun Microsystems.
PREPRESS PRODUCTS
PressWise for Macintosh is a program used to assemble multipage PostScript
language files into imposition forms for printing, folding and binding. It gives
prepress professionals control over page positioning, signature design and
custom printer's marks. PrePrint is a program for generating four-color
separations on the Macintosh. For the Macintosh and Windows platforms, TrapWise
performs professional-quality process color trapping on PostScript language
files, particularly for high-throughput production. Print Central is a
Macintosh-based print server and Color Central is an open prepress interface
(OPI) image server for Macintosh and Windows.
INFORMATION PRODUCTS
Acrobat is a family of software products that allows fully formatted, electronic
documents that may contain distinctive typefaces, color, graphics and
photographs, to be easily distributed, accessed and reused, regardless of the
hardware platform, operating system or application used to create the originals.
Receivers can view, search, navigate, print and store the documents on their
existing systems, enabling companies to easily create, manage and distribute
visually rich information.
Acrobat software describes documents in a single, universal format called the
Portable Document Format (PDF). Based on the PostScript language, PDF is a
device- and resolution-independent description of documents containing any
combination of text, graphics and still images, in documents of any size and
visual complexity. A PDF file describes the visual (printable) aspects of a
document, as well as elements such as annotations (notes), hypertext links,
"thumbnail" views of pages, and bookmarks.
Adobe Acrobat software enables accurate communication of digital content
(combined graphics/text today and multimedia "documents" in the future) across
multiplatform networks. Documents can be viewed, printed, annotated and sent on
to other users. Acrobat software supports interapplication communication
standards, such as OLE, DDE
7
and Apple events, to integrate with key applications, such as Lotus Notes.
Customers with specific needs can build on Acrobat software's open architecture
to create extended functionality or to further integrate Acrobat with other
systems or applications.
SALES AND MARKETING
The PostScript language and Acrobat software's PDF are open specifications
published by Adobe. Approximately 350 software companies have introduced or
announced application products that support the PostScript language. More than
5,000 application programs currently support the PostScript language on
platforms that include personal computers, minicomputers, UNIX workstations and
mainframes from all major manufacturers.
Adobe licenses its PostScript products to more than 50 computer and printer
manufacturers, which in turn distribute their products worldwide. The Company
derives a significant portion of its royalties from international sales of
printers and imagesetters by its OEM customers.
OEMs and VARs distribute Adobe products with hardware and software products in
various configurations designed to best meet specific end user needs. Adobe, to
a limited extent, also markets directly to the end user. In 1993, the Company
focused on the development of a separate graphic arts dealer channel of OEMs and
VARs to distribute its prepress product line, which includes Adobe PressWise,
Adobe PrePrint and Adobe TrapWise. In March 1994, the Company completed its
acquisition of Compumation, Incorporated, adding Print Central and Color Central
to the prepress product line.
The primary distribution channels for Adobe Acrobat software are expected to be
VARs, systems integrators, information integrators and the retail channel.
COMPETITION
The Adobe PostScript interpreter faces indirect competition from major computer
companies that have developed or may develop a competitive page description
language. However, to date those products use a proprietary printer control
language that provides less functionality and flexibility than the Adobe
PostScript interpreter. The Company believes that Hewlett-Packard's LaserJet
product family, with its proprietary PCL page description language, has the
largest installed base of any low-cost laser printer. Additionally, several
companies have produced their own implementations of the PostScript language,
and some have announced contracts with printer manufacturers, most of whom are
not currently licensing Adobe PostScript software products.
Adobe believes that the principal competitive factors for OEMs in selecting a
page description language interpreter are product capabilities, reliability,
support, engineering development assistance and price. The Company believes that
it competes very favorably in these areas. The Company also believes that no
other page description language interpreter provides equivalent functionality
together with the broad support of software developers.
With the Display PostScript system, the Company also competes with screen
imaging
8
software incorporated in other computer systems' architectures, such as
QuickDraw in the Macintosh, GDI in Windows, and GPI in OS/2. Each computer
platform has its own native screen imaging software. In the Macintosh, DOS and
Windows platforms, that technology is provided by the operating system vendor.
In the UNIX environment, Display PostScript has been licensed by the substantial
majority of UNIX hardware vendors and has become the de facto standard.
Prepress products face direct and indirect competition. Print Central 3.0.4 is a
Macintosh-based print server. It manages multiple clients and printers
simultaneously, and competes indirectly with AppleShare from Apple Computer and
directly with the non-Macintosh product Helios EtherShare. Color Central 2.1.1
is an OPI image server running on the Macintosh and Windows platforms. It
manages printing and images used in page makeup, and competes with Helios
EtherShare OPI and Archetype Intercep.
Electronic document communication, the market for Acrobat, is still in its
infancy. A number of competing products and technologies have been introduced,
including Common Ground from No Hands Software, Replica from Farallon and Envoy
from Novell. The Company believes that Acrobat is more functional than these
competitors, although no definitive leader has emerged. The Company believes
that it can leverage its expertise and market position to create a standard and
provide technology that allows the transfer of electronic documents across
various computer platforms.
TRAINING
For a fee, the Company provides training in the use of the PostScript language
and the Display PostScript System to software developers, OEMs and corporate
customers. The Company also has certified third-party training providers in the
United States, United Kingdom, France and Germany.
9
APPLICATION PRODUCTS DIVISION
PRINCIPAL PRODUCTS
In application software, Adobe leverages the use of PostScript language-based
authoring tools for the creation of digital content. Adobe's digital type
business provides a principal raw material used to create documents, while its
graphics products are recognized by the industry for creating new markets and
setting the standard against which other products are measured. Adobe's vision
is to build application software with extensible architectures that enable
software developers to design software "plug-ins." These plug-ins will allow
users to go beyond their mission-critical tasks and obtain more vertical market
solutions.
APD is organized into three product units: graphics and video, print publishing
and consumer products. Within these units, Adobe develops, markets, licenses and
supports graphics and type products and application software, utility software
for graphics professionals, and software for the consumer market.
GRAPHICS AND VIDEO - DIGITAL IMAGING PRODUCTS
Adobe Photoshop software is essentially an electronic darkroom that provides
users with professional prepress, color correction, paint and special effects
editing tools for color and black-and-white photographs and illustrations.
Introduced in 1990, Adobe Photoshop has become the standard tool for the
prepress, publishing and graphic arts industries. The latest release, version
3.0, was introduced in 1994 for Macintosh, Power Macintosh and Windows
platforms. Adobe Photoshop 2.5.2 for the UNIX environment was also introduced in
1994.
GRAPHICS AND VIDEO - VIDEO PRODUCTS
Adobe Premiere software allows users to edit video, audio, animation, photos and
graphics to create high-quality QuickTime or Microsoft Video for Windows digital
movies and videotapes. With Adobe Premiere, users can produce movies for small-
or full-screen viewing, or export to tape. Adobe Premiere is available on the
Macintosh, Power Macintosh and Windows platforms.
After Effects is a digital post-production tool for compositing, motion graphics
and special effects. Its interface design, speed and versatility give users the
control, efficiency and quality output required in professional film, broadcast
and video environments. After Effects is available for the Macintosh.
GRAPHICS AND VIDEO - ILLUSTRATION PRODUCTS
Adobe Illustrator is the leading illustration and page design tool available for
the Macintosh. The program simplifies the creation, manipulation and refinement
of artwork with advanced features for editing, text handling, color support and
more. The latest release, version 5.5, was introduced in 1994 for the Macintosh
and Power Macintosh platforms.
10
Adobe also develops utility software products that complement other programs,
such as Adobe Illustrator, FreeHand and Deneba Canvas. Adobe Dimensions is a
software tool for the Macintosh that is used to create 3D objects. Adobe
Streamline is a tool for Macintosh and Windows platforms that converts black-
and-white or color bitmapped images into PostScript language artwork for use
with other programs.
IntelliDraw is a "smart" drawing program for Macintosh and Windows that helps
users create and refine commonly used graphics, such as schematics, maps,
organizational charts, diagrams, forms and space plans.
GRAPHICS AND VIDEO - TYPE PRODUCTS
Adobe markets the industry's largest family of digital type products, including
more than 2,000 typefaces in the Adobe Type Library. These typefaces are
marketed individually, in special collections and on CD-ROM.
Adobe Type Manager (ATM) is a software utility that eliminates jagged type on
the computer screen and printed page. It enables Macintosh and Windows users to
scale Type 1 fonts to any size and print them at the highest possible resolution
on the full range of Adobe PostScript and non-PostScript printers. ATM is sold
as an individual product and is also included with every Adobe Type 1 typeface
package, in many other Adobe products, and is available bundled with a variety
of third-party applications and printer products. It is available for Macintosh,
Power Macintosh and Windows platforms.
Adobe SuperATM is an enhanced version of ATM software that automatically creates
"substitute fonts" to simulate typefaces missing from a computer. SuperATM
enables users to view, edit and print text that has the same look and feel as
that of the original document, and is compatible with all leading software
applications. The program is available for the Macintosh.
Type On Call is a CD-ROM that contains more than 2,000 encrypted typefaces from
the Adobe Type Library. The CD contains Adobe Type Reunion and ATM software, 30
typefaces and access codes for two additional typeface packages from a
preselected list. Customers can call Adobe via a toll-free, 24-hour line to buy
access codes for additional typefaces. Type On Call is available for Macintosh
and Windows.
GRAPHICS AND VIDEO - PRESENTATION PRODUCTS
Persuasion is a desktop presentation program for producing or delivering
conceptual and data-intensive presentations. Users can automatically generate
output for 35mm color slides, overheads and on-screen presentations, with
speaker notes and audience handouts, from the information they gather and create
on the desktop. The current version, Persuasion 3.0 for the Macintosh platform,
began shipping in February 1994 and is also available for the Power Macintosh.
Persuasion 3.0 for Windows was released in September 1994.
11
PRINT PUBLISHING - PAGE ASSEMBLY PRODUCTS
PageMaker offers tools for each person in the publishing cycle who produces
professional-quality materials: graphic artists and designers; writers, editors
and typesetters; and production artists and prepress professionals. The program
sets up the computer screen as an electronic paste-up board and gives the user a
toolbox of design aids for electronic page composition, thereby reducing the
time and expense associated with traditional publishing techniques. PageMaker
allows the user to design, lay out and produce high-quality printed
communications such as newsletters, brochures, manuals, and other more complex
technical documents. PageMaker 5.0 shipped in June 1993 for the Windows
platform, July 1993 for the Macintosh and May 1994 for the Power Macintosh.
PRINT PUBLISHING - ACCESSORY PRODUCTS
Adobe Fetch is a digital cataloging program that organizes images, graphics,
publications, presentations, sounds, movies and other multimedia files into a
visual on-line library. It is used to find and retrieve source files for use in
other materials. Fetch is available for the Macintosh.
Adobe Gallery Effects is a three-volume collection of plug-in filters for
automatic image enhancement directly within the leading graphics software
applications. Gallery Effects is available on the Macintosh, Power Macintosh and
Windows platforms.
TextureMaker is a resolution-independent, texture-design program that creates
textures such as marble, wood, stone, liquid and cloud effects. The software
includes more than 100 predefined textures and is available for the Macintosh
and Power Macintosh.
CONSUMER PRODUCTS
The Company offers a line of affordable software products designed for personal
use. These products include personal information managers and contact software,
entry-level paint and drawing programs, automated desktop publishing software,
and design software for home improvement projects.
SALES AND MARKETING
Application products generally are marketed through the reseller channel and a
direct sales force. There are more than 9,000 authorized resellers in the United
States and Canada, and more than 150 distributors throughout Europe and the
Pacific Rim. Adobe Photoshop, Adobe Illustrator, Adobe Premiere and Adobe type
products are also provided by hardware OEMs and software vendors who bundle
Adobe software with scanners, CPUs, hardware peripherals and other software
applications.
COMPETITION
The markets for Adobe's applications for image processing, graphics and digital
video are characterized by intense competition, evolving industry standards,
rapid technology developments, and frequent new product introductions. In the
Macintosh and Windows
12
markets, several competitors have an established presence in the retail channel.
In addition, the market for high-end graphics on the Windows platform is not as
mature as that for the Macintosh. As a result, acceptance of the Company's
programs on that platform will depend upon how the market evolves. Adobe's
future success will depend upon its ability to enhance its existing products,
introduce new products on a timely and cost-effective basis, meet changing
customer needs, extend its core technology into new applications, and anticipate
or respond to emerging standards and other technological changes.
The Company believes that the principal competitive factors in the personal
computer applications market include product features and functions, installed
base, ease of use, product reliability, and price and performance
characteristics. The majority of the Company's application products compete
favorably in their markets on the basis of product features and reliability,
ease of use, and price and performance characteristics. Adobe also believes that
its application programs gain a competitive benefit from their foundation in
PostScript language technology. However, Adobe faces challenges in several areas
and expects to encounter continued competition both from established companies
and from new companies that are now developing, or may develop, competing
products.
Price competition is a factor encountered by Adobe in several of its product
categories. Suppliers in certain segments of the microcomputer software market
have significantly reduced prices through the use of "site licenses" (which
permit the copying of a program and its documentation), direct price offers,
bundling, software suites and discount pricing for large-volume retail
customers. The growth of high-volume retailers, which compete primarily on the
basis of price, has intensified the competition between software vendors. Price
competition is particularly keen in the consumer software market, and there is
no assurance that current pricing levels can be maintained.
Large-scale electronic publishing systems for publication and engineering
departments, as well as for other groups requiring page-composition features,
are offered by several companies, including Interleaf Inc. and Frame Technology.
Additionally, companies that develop word-processing software are incorporating
desktop publishing features into their products. Finally, numerous low-end
desktop publishing packages are available from a variety of software developers,
such as Serif's Page Plus and Microsoft's Publisher. As a result, Adobe expects
to face increasing competition in the desktop publishing market from a number of
other software developers, some of whom may have greater financing, marketing
and technological resources than that of Adobe, targeting one or more of the
various markets for which Adobe products are designed.
In recent years, PageMaker has been subject to increasing competition. The
Macintosh version of PageMaker 5.0 competes with software from a variety of
independent vendors, but principally Quark, Inc.'s QuarkXPress. The Windows
version of PageMaker 5.0 competes with software offered by several vendors,
principally Ventura Publisher, marketed and sold by Corel Corporation,
QuarkXPress for Windows, and FrameMaker by Frame Technology Corporation. Adobe
Illustrator 5.5 for Macintosh and Windows competes with FreeHand, CorelDraw and
Deneba Canvas. Competition for Adobe Photoshop 3.0 on the Windows platform is
from Micrografx Picture Publisher and Fractal Design Painter X2.
13
Adobe Premiere 4.0 for the Macintosh and Windows platforms is a video editing
program. The market for desktop video editing is young; however, the Company
faces competition from products such as VideoStudio from U-Lead, Digital Video
Producer from Asymetrix, MediaMerge from ATI, Razor from In:sync and VideoShop
from Avid.
After Effects 2.0 is a motion graphics, digital compositing and special effects
program for broadcast video and film for the Macintosh. The program typically
retails for approximately $1,995 and competes with software from companies that
include Parallax and Discreet Logic, costing more than $25,000, and dedicated
hardware from Quantel and other companies that costs more than $500,000.
Competition for digital type market share is intense. Adobe's Type 1 outline
font format, introduced in 1984 and published as part of the open PostScript
language standard, provides digital type that can be printed at any resolution,
on any type of output device. Today, more than 30 vendors have developed over
15,000 Type 1 typefaces, including Japanese and Cyrillic typefaces.
Persuasion 3.0 for the Macintosh and Windows platforms, and Persuasion 2.1 for
Windows are business presentations programs whose major competitors include
Microsoft's PowerPoint (the only other such program to support both Macintosh
and Windows), Software Publishing's Harvard Graphics for Windows, and Lotus'
Freelance Graphics for Windows.
The Consumer products include SuperPaint, DateBook Pro and TouchBase Pro
software. Each product has numerous competitors, and price competition is quite
intense in this market.
SuperPaint software combines painting, drawing, and image-enhancement
capabilities in a single program for general business users and graphics
professionals. It competes with UltraPaint and Artworks from Deneba Software,
DeskPaint/DeskDraw from Zedcor, and the combination of MacPaint and MacDraw from
Claris.
DateBook Pro for the Macintosh competes with Now Up-To-Date from Now Software,
DayMaker from Pastel Software, and CalendarMaker from CE Software. As a Personal
Information Manager (PIM) integrated with TouchBase, it competes with ACT from
Symantec.
TouchBase Pro for the Macintosh and TouchBase for Windows is a contact manager
that competes with Now Contact from Now Software, Dynodex from Portfolio
Systems, InTouch from Advanced Software, Ecco from Arabesque, and AddressBook
Plus from Spinnaker. As a PIM integrated with DateBook, it competes with ACT
from Symantec.
TRAINING
Adobe's Classroom in a Box curriculum kit is available to third-party training
companies, consultants and educational institutions that teach Adobe
Illustrator, Adobe Photoshop, Adobe Premiere and complementary programs. In
addition, Adobe publishes a line of reference books through Adobe Press, a joint
book publishing venture between the
14
Company and Macmillan Computer Publishing, which also provides training to end
users. These products, as well as the Company's "Train the Trainer" classes,
generate revenue and promote Adobe application products.
MANUFACTURING
Duplication of disks, printing and assembly of the components are performed
primarily by outside parties in the United States for the United States and
Pacific Rim markets. Shipment of completed products is performed by the Company.
Disk duplication for European language versions of the Company's products is
managed through the European headquarters. The duplicated disks of European-
language versions of products are then forwarded to McQueen Holdings Limited
("McQueen"), an affiliate of the Company in Scotland, which prints and assembles
the components and ships the completed product. Quality control tests are
performed on all duplicated disks and finished products.
To date, Adobe has not experienced significant difficulties in obtaining raw
materials for the manufacture of its products or in the duplication of disks,
printing and assembly of components, although an interruption in production by a
supplier could result in a delay in shipment of Adobe's products. There was no
material backlog of orders as of November 25, 1994.
15
PRODUCT DEVELOPMENT
Since the personal computer software industry is characterized by rapid
technological change, a continuous high level of expenditures is required for
the enhancement of existing products and the development of new products. Adobe
primarily develops its software internally. The Company sometimes acquires
products developed by others by purchasing the stock or assets of the business
entity that held ownership rights to the technology. In other instances, Adobe
has licensed or purchased the intellectual property ownership rights of programs
developed by others with license or technology transfer agreements that may
obligate the Company to pay royalties, typically based on a percentage of the
revenues generated by those programs.
During the years ended November 25, 1994, November 26, 1993, and November 27,
1992, the Company's research and development expenses, including costs related
to contract development, were $99.0 million, $86.7 million and $65.2 million,
respectively. During 1994, the Company acquired LaserTools Corporation and
Compumation, Incorporated, and $15.5 million was allocated to in-process
research and development, and was expensed at the time of these acquisitions. In
1993, the Company acquired two software developers: AH Software, Inc. (doing
business as After Hours Software) and The Company of Science & Art.
Approximately $4.3 million of the total purchase price for these two companies
was allocated to in-process research and development, and was expensed at the
time of acquisition. In 1992, the Company acquired two related companies, OCR
Systems Incorporated and Nonlinear Technologies, Incorporated, and wrote off
$6.3 million of in-process research and development at the time of the
acquisitions.
16
PRODUCT PROTECTION
Adobe regards its software as proprietary and protects it with copyrights,
patents, trademarks, trade secret laws, internal and external nondisclosure
precautions, and restrictions on disclosure and transferability that are
incorporated into its software license agreements. The Company protects the
source code of its software programs as trade secrets, and makes source code
available to OEM customers only under limited circumstances and specific
security and confidentiality constraints.
The Company's products are generally licensed to end users on a "right to use"
basis pursuant to a license that is nontransferable and restricts the use of the
products to the customer's internal purposes on a designated number of printers
or computers. The Company also relies on copyright laws and on "shrink wrap"
licenses that are not signed by the end user. Copyright protection may be
unavailable under the laws of certain countries. The enforceability of "shrink
wrap" licenses has not been conclusively determined. Adobe has obtained many
patents and has registered numerous trademarks and logos in the United States
and foreign countries.
Policing unauthorized use of computer software is difficult, and software piracy
is a persistent problem for the software industry. This problem is particularly
acute in international markets. Adobe conducts vigorous anti-piracy programs.
Adobe products do not contain copy protection, except on copies for
international distribution in certain countries, and except for its highest
priced and specialized prepress products, TrapWise and PressWise. Many products,
including PageMaker 5.0, Adobe Photoshop and Adobe Illustrator, incorporate
network copy-detection features. These capabilities help encourage compliance
with the Company's license agreements by alerting customers about certain
concurrent usage problems over a given network. Network copy detection has
become increasingly popular among higher priced software products.
Adobe believes that, because computer software technology changes and develops
rapidly, patent, trade secret and copyright protection are less significant than
factors such as the knowledge, ability and experience of its personnel, name
recognition, contractual relationships and ongoing product development.
17
EMPLOYEES
As of December 31, 1994, Adobe employed 1,565 people, none of whom are
represented by a labor union. The Company has not experienced work stoppages and
believes its employee relations are good. Competition in recruiting personnel in
the software industry is intense. Adobe believes its future success will depend
in part on its continued ability to recruit and retain highly skilled
management, marketing and technical personnel.
18
ITEM 2. PROPERTIES
The following table sets forth the location, approximate square footage and use
of each of the principal properties used by the Company. Except as where
indicated, all of the properties are leased or subleased by the Company. Such
leases expire at various times through August 1996. The annual base rent expense
for all facilities (including operating expenses, property taxes and
assessments) is currently $14.8 million and is subject to annual adjustment.
Approximate
Square
Location Footage Use
- - ------------------------------ ----------- ----------------------
The Americas:
Mountain View, California 290,018 Research, product
development, sales,
marketing and
administration
Seattle, Washington 185,000 Product development and
customer support
Santa Clara, California 127,688 Customer support and
warehouse/distribution
center
Europe:
Edinburgh, Scotland (Owned) 22,000 Sales, marketing and
administration
Pacific Rim:
Tokyo, Japan 20,237 Sales, marketing and
administration
In general, all facilities are in good condition and are operating at capacities
which range from 75 percent to 100 percent.
19
ITEM 3. LEGAL PROCEEDINGS
Not applicable.
20
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A special meeting of shareholders was held on August 31, 1994.
A proposal to approve and adopt the Restated Agreement and Plan of Merger and
Reorganizaton (the "Merger Agreement"), dated as of July 13, 1994, among Adobe,
P Acquisition Corp ("Merger Sub") and Aldus Corporation ("Aldus"), and to
approve the merger (the "Merger") of Merger Sub with and into Aldus pursuant to
the Merger Agreement and the issuance of shares of Adobe common stock in the
Merger was approved by the shareholders. This proposal received the following
votes:
For: 35,704,518
Against: 158,725
Abstain: 519,701
As a result of the Merger, Aldus shareholders received 1.0 share of Adobe common
stock for each share of their Aldus common stock, and Aldus became a wholly
owned subsidiary of Adobe.
Also, a proposal to approve and adopt an amendment (the "By-Law Amendment") to
Adobe's Restated By-Laws to increase the maximum authorized number of directors
from seven to eight. Approval of the Merger Agreement, the Merger and the
issuance of shares of Adobe common stock in the Merger is a condition to such
amendment of Adobe's Restated By-Laws. This proposal received the following
votes:
For: 35,878,867
Against: 186,130
Abstain: 534,240
In addition, a proposal to approve Adobe's 1994 Performance and Restricted Stock
Plan (the "Performance Plan"). This Performance Plan is an amendment and
restatement of the 1989 Restricted Stock Plan which increases by 500,000 the
number of shares reserved for issuance under the plan and provides for
performance-based awards. This proposal received the following votes:
For: 35,201,112
Against: 5,137,626
Abstain: 316,922
Broker non-votes are included in the determination of the number of shares
present and voting for purposes of determining the presence of a quorum at the
Company's annual meeting of shareholders. They are not, however, counted for
purposes of determining the number of votes cast for a proposal.
21
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
The Company's common stock is traded on the Nasdaq National Market under the
symbol "ADBE". On December 30, 1994, there were 2,211 holders of record of the
Company's common stock. Because many of such shares are held by brokers and
other institutions on behalf of shareholders, the Company is unable estimate the
total number of shareholders represented by these record holders. The following
table sets forth the high and low sales price per share of the Company's common
stock, and the dividends paid per share, for the periods indicated, as adjusted
for a two-for-one stock split effective July 1993.
Price Range Per Share
-------------------------
High Low Dividend
---------- ----------- -----------
Fiscal 1993:
First Quarter $ 22.88 $ 14.50 $ .05
Second Quarter 35.75 18.50 .05
Third Quarter 37.00 19.25 .05
Fourth Quarter 24.63 16.25 .05
Fiscal Year 37.00 14.50 .20
Fiscal 1994:
First Quarter 32.00 19.75 .05
Second Quarter 34.50 21.50 .05
Third Quarter 34.50 24.50 .05
Fourth Quarter 38.50 29.75 .05
Fiscal Year 38.50 19.75 .20
The Company has paid cash dividends on its common stock each quarter since the
second quarter of 1988. The declaration of future dividends is within the
discretion of the Board of Directors of the Company and will depend upon
business conditions, results of operations, the financial condition of the
Company, and other factors.
22
ITEM 6. SELECTED FINANCIAL DATA
THE FOLLOWING SELECTED CONSOLIDATED FINANCIAL DATA (PRESENTED
IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND EMPLOYEE DATA)
ARE DERIVED FROM THE COMPANY'S CONSOLIDATED FINANCIAL
STATEMENTS. THIS DATA SHOULD BE READ IN CONJUNCTION WITH THE
CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO, AND
WITH ITEM 7., MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Years Ended
--------------------------------------------------------------------
Nov. 25 Nov. 26 Nov. 27 Nov. 29 Nov.30
1994 1993 1992 1991 1990
--------- --------- --------- --------- ---------
Operations:
Revenue $ 597,772 $ 520,237 $ 440,063 $ 397,183 $ 303,713
Merger transaction and
restructuring costs 72,183 -- -- -- --
Income before
income taxes 39,997 105,060 79,448 118,279 101,556
Net income(1) 6,309 66,545 50,389 75,444 63,831
Net income per share(1)(2) 0.10 1.11 0.82 1.23 1.09
Dividends declared
per common share(2)(3) .20 .20 .16 .16 .12
Financial position:
Cash and short-term
investments 400,360 308,985 230,980 222,551 145,832
Working capital 363,631 318,215 247,878 251,721 163,676
Total assets 625,503 529,840 437,623 399,764 286,882
Shareholders' equity 456,771 414,102 351,743 338,079 223,590
Additional data:
Worldwide employees 1,582 2,051 1,894 1,653 1,317
<FN>
- - -------------------
(1) Reflects incremental costs incurred during 1994 in connection with the
acquisition of Aldus and the write-off of acquired in-process research and
development, totaling $72.2 million and $15.5 million, respectively. (For
additional information, see Note 2 and Note 6 in the Notes to Consolidated
Financial Statements.)
(2) Adjusted for a two-for-one stock split, effective July 1993.
(3) Amounts prior to the merger with Aldus on August 31, 1994, have not been
restated to reflect the effects of the pooling of interest.
23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION (PRESENTED IN MILLIONS, EXCEPT PER SHARE
AMOUNTS) SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED
FINANCIAL STATEMENTS AND NOTES THERETO.
RESULTS OF OPERATIONS
OVERVIEW
Adobe develops, markets and supports computer software products and technologies
that enable users to create, display, print and communicate electronic
documents. The Company licenses its technology to major computer and publishing
suppliers, and markets application software products and typeface products for
authoring and editing visually rich documents, including digital and video
output. The Company distributes its products through a network of original
equipment manufacturer (OEM) customers, distributors and dealers, and value-
added resellers (VARs) and system integrators. The Company has operations in the
Americas, Europe and the Pacific Rim.
In August 1994, the Company acquired Aldus Corporation ("Aldus"). Aldus began
operations in 1984 and created computer software solutions that help people
throughout the world effectively communicate information and ideas. Aldus
focused on three lines of business: applications for the professional print
publishing, graphics and prepress markets; applications for the general consumer
market; and applications for the interactive publishing market. To effect the
combination, approximately 14.2 million shares of Adobe's common stock were
issued in exchange for all of the outstanding common stock of Aldus. The merger
was accounted for by the pooling of interests method, and accordingly, all
annual and interim financial information prior to the merger has been restated
to combine the results of the Company and Aldus. In connection with the merger,
the Company recorded $14.6 million of merger transaction costs and $57.6 million
of restructuring costs in the fourth quarter of 1994. In addition, the Company
incurred one-time expenses that are not included in the restructuring charge but
were related to the Aldus acquisition. These charges included writing off
certain capitalized software development costs, transition personnel bonuses,
and relocation expenses among others, and totaled approximately $10.1 million.
REVENUE
1994 Change 1993 Change 1992
-------- ------ ------ ------ ------
TOTAL REVENUE $597.8 15% $520.2 18% $440.1
In 1994, the Company's worldwide revenue grew 15 percent over the prior year,
compared with revenue growth of 18 percent in 1993 over 1992.
Revenue growth in 1994 and 1993 is attributable to an increase in application
products revenue resulting from the release of new and enhanced products, as
well as growth in the
24
Company's royalty revenue from licensing its PostScript interpreter to OEM
customers. Product unit volume (as opposed to price) growth was the principal
factor in the Company's revenue growth in application products revenue. The
continued decline in laser printer prices was offset by increases in shipments
of the Configurable PostScript Interpreter (CPSI), resulting in an increase in
1994 licensing revenues.
1994 Change 1993 Change 1992
------ ------ ------ ------ -----
PRODUCT GROUP REVENUE --
LICENSING $156.7 7% $146.2 -4% $152.7
Percentage of
total revenue 26.2% 28.1% 34.7%
Licensing revenue is derived from shipments by OEM customers of products
containing the PostScript interpreter and the Display PostScript system. Such
products include printers in both Roman and Japanese languages, imagesetters and
workstations. Licensing revenue is also derived from shipments of products
containing CPSI by OEM customers. CPSI is a fully functional PostScript
interpreter that resides on the host computer system rather than in a dedicated
controller integrated into an output device. The configuration flexibility of
CPSI allows OEMs and software developers to create and market a variety of
PostScript products independently of controller hardware development.
The number of units shipped by OEMs continued to grow on an annual basis in 1994
and 1993. Royalty per unit is generally calculated as a percentage of the end
user list price of a printer. During 1993, several of the Company's OEMs
introduced lower end printers, resulting in a shift in product mix to a lower
average list price, and accordingly a decline in licensing revenue compared to
1992. While the product mix shift continued in 1994, shipments of products
containing the PostScript interpreter were supplemented by increased shipments
of several new products containing CPSI, producing increased licensing revenue
in 1994 over 1993.
The Company has seen year-to-year increases in the number of OEM customers from
which it is receiving licensing revenue, demonstrating continued acceptance of
PostScript software, as well as reflecting a diversification of the Company's
customer base across Macintosh, IBM PC and compatibles, and multiple platform
markets. No OEM customer accounted for more than 10 percent of the Company's
total revenue in 1994.
1994 Change 1993 Change 1992
------ ------ ------ ------ ------
PRODUCT GROUP REVENUE --
APPLICATION PRODUCTS $441.1 18% $374.0 30% $287.4
Percentage of
total revenue 73.8% 71.9% 65.3%
Application products revenue is derived from shipments of application software
programs marketed through retail and distribution channels; however, the
information products are becoming more widely distributed through VARs and
systems integrators.
Application products revenue grew in 1994 and 1993 due to increased demand for
Adobe
25
Illustrator, Adobe Photoshop and PageMaker for both the Macintosh and Windows
platforms. In addition, the release of new versions of Adobe Illustrator, for
the Macintosh, and Adobe Photoshop and PageMaker, for the Macintosh and Windows
platforms, contributed to the revenue growth in 1994 and 1993. The Macintosh
versions include new features and native support for the Power Macintosh
computers. The release of Aldus FreeHand 4.0 (divested by the Company in January
1995) for Windows and the Power Macintosh platforms also contributed to 1994
revenue growth. Localized versions for the Japanese market of Adobe Photoshop,
Adobe Illustrator and PageMaker for the Macintosh platform also contributed to
revenue growth from application products, while reduced sales for individual
typeface packages offset a portion of the revenue growth in 1994. In addition,
increasing sales for Adobe Premiere, a video editing and sequencing tool; After
Effects, a video post-production special effects tool; and Fetch, a digital
media cataloging and retrieval tool, contributed to the increase in application
products revenue growth. Adobe Illustrator and Adobe Photoshop were also shipped
for selected UNIX platforms in 1994, contributing to product revenue increases.
DIRECT COSTS
1994 Change 1993 Change 1992
------ ------ ----- ------ -----
DIRECT COSTS $111.8 16% $96.7 10% $87.9
Percentage of
total revenue 18.7% 18.6% 20.0%
Direct costs include royalties; amortization of typeface production costs;
amortization of acquired technologies; and direct product, packaging and
shipping costs. Typeface production costs were fully amortized in 1994.
Licensing revenue typically has higher gross margins than application products
revenue; therefore, revenue mix will affect overall gross margins. During 1994,
the revenue mix of application products as a percentage of total revenue
increased to 73.8 percent, compared to 71.9 percent during 1993, while direct
costs as a percentage of total revenue were 18.7 percent, compared to 18.6
percent in 1993. The increase in direct costs, in absolute dollars, has been
mitigated by actions taken by the Company to reduce direct costs. In 1993, the
Company achieved lower per unit manufacturing costs for certain products,
reduced royalty agreement rates, and reduced typeface production costs
amortization, all of which contributed to minimal growth of 1994 direct costs as
a percentage of total revenue.
The Company also delivers its type library on its Type On Call CD-ROM media, and
end users wishing to license typeface designs call the Company with a credit
card number to receive the unlocking code for the desired typeface. This method
of delivery also contributes to reduced direct costs. Other applications are
also available through the Company's distributors on CD-ROM.
26
OPERATING EXPENSES
1994 Change 1993 Change 1992
------ ------- ------ ------ ------
SOFTWARE DEVELOPMENT
COSTS --
RESEARCH AND
DEVELOPMENT $99.0 14% $86.7 33% $65.2
Percentage of
total revenue 16.6% 16.7% 14.8%
Research and development expenses consist principally of salaries and benefits
for software developers, contracted development efforts, related facilities
costs, and expenses associated with computer equipment used in software
development.
Research and development expense has increased significantly over the last three
years as the Company invested in new technologies, new product development, and
the infrastructure to support such activities. The increase reflects the
expansion of the Company's engineering staff and related costs required to
support its continued emphasis on developing new products and enhancing existing
products. Many of these engineers are working with OEM customers to design and
implement PostScript Level 2 devices. The Company has begun working with many of
its OEM customers in a co-development program. This allows customers to be more
self-sufficient in new device development by taking on more of the
implementation task themselves rather than relying so heavily on the Company's
engineers. While this mitigates certain costs, the Company continues to make
significant investments in development of its PostScript and application
software products.
The Company believes that continued investments in research and development are
necessary to remain competitive in the marketplace, and are directly related to
continued, timely development of new and enhanced products. The Company intends
to continue recruiting and hiring experienced software developers but expects
that research and development expenditures in 1995 will approximate current
spending levels as a percentage of revenue.
1994 Change 1993 Change 1992
------ ------- ------ ------ ------
SOFTWARE DEVELOPMENT
COSTS --
AMORTIZATION OF
CAPITALIZED SOFTWARE
DEVELOPMENT COSTS $13.3 30% $10.2 1% $10.1
Percentage of
total revenue 2.2% 2.0% 2.3%
In the implementation of Statement of Financial Accounting Standards (SFAS) No.
86, "Accounting for the Costs of Computer Software to Be Sold, Leased, or
Otherwise Marketed," software development expenditures on Adobe products, after
achieving technological feasibility, were deemed to be immaterial. Certain
software development expenditures on Aldus products have been capitalized and
are being amortized over the
27
lives of the respective products. In the fourth quarter of 1994, software
development expenditures on Aldus products, after reaching technological
feasibility, were immaterial and the Company anticipates this trend to continue
in the future. Accordingly, the fourth quarter of 1994 did, and all of 1995
will, reflect the additional expense of amortizing capitalized software
development costs acquired with Aldus, in addition to the actual development
expenditures (classified as research and development) made prior to achieving
technological feasibility.
Amortization of capitalized software development costs increased in 1994 due to
the amortization of PageMaker 5.0 released in the second half of 1993, and the
release of other new application products.
1994 Change 1993 Change 1992
------ ------ ------ ------ ------
SALES, MARKETING AND
CUSTOMER SUPPORT $201.0 18% $170.9 17% $145.7
Percentage of
total revenue 33.6% 32.9% 33.1%
Sales, marketing and customer support expenses generally include salaries and
benefits, sales commissions, travel expenses and related facility costs for the
Company's sales, marketing, customer support and distribution personnel. Sales,
marketing and customer support expense also includes the costs of programs aimed
at increasing revenue, such as advertising, trade shows and other market
development programs.
Increases in sales, marketing and customer support expenses are due to increased
advertising and promotional expenditures for upgrades of existing products and
further development of customer and technical support services to support a
growing installed base of customers.
Continuing efforts to expand markets and increase penetration into targeted
software markets, and increasing competition in the software industry, are
expected to cause 1995 sales, marketing and customer support expenditures to
approximate the same spending levels as a percentage of revenue.
1994 Change 1993 Change 1992
------ ------ ------ ------ ------
GENERAL AND
ADMINISTRATIVE $54.0 -9% $59.2 17% $50.4
Percentage of
total revenue 9.0% 11.4% 11.5%
General and administrative expenses consist principally of salaries and
benefits, travel expenses, and related facility costs for the finance, human
resources, legal, information services and administrative personnel of the
Company. General and administrative expenses also include outside legal and
accounting fees, bad debts, and expenses associated with computer equipment and
software used in the administration of the business.
During 1993, the growth in spending on general and administrative expenses was
28
attributable to the growth in the systems, processes and people necessary to
support overall increases in the scope of the Company's operations, as well as
additional costs incurred for legal defenses and settlement of an Aldus class-
action securities lawsuit. General and administrative spending decreased as a
percentage of revenue in 1994 from 1993 due to a reduction of salary and
depreciation expense resulting from restructuring activities, as well as reduced
legal expenditures.
The Company expects general and administrative spending to be a lower percentage
of revenue in 1995 than was achieved in 1994.
1994 Change 1993 Change 1992
------ ------ ------ ------ ------
WRITE-OFF OF ACQUIRED
IN-PROCESS RESEARCH
AND DEVELOPMENT $15.5 260% $4.3 -32% $6.3
Percentage of
total revenue 2.6% 0.8% 1.4%
During 1994, the Company acquired LaserTools Corporation and Compumation,
Incorporated for an aggregate purchase price of $17.0 million, of which $15.5
million was allocated to in-process research and development, and was expensed
at the time of these acquisitions.
During 1993, the Company acquired two software developers -- AH Software, Inc.
(doing business as After Hours Software) and The Company of Science & Art.
Approximately $4.3 million of the total purchase price for these two companies
was allocated to in-process research and development, and was expensed at the
time of acquisition.
During 1992, the Company acquired OCR Systems Incorporated and Nonlinear
Technologies, Incorporated for an aggregate purchase price of $6.8 million, of
which $6.3 million was allocated to in-process research and development, and was
expensed at the time of these acquisitions.
1994 Change 1993 Change 1992
------ ------ ------ ------ ------
MERGER TRANSACTION AND
RESTRUCTURING COSTS $72.2 -- -- -- --
Percentage of
total revenue 12.1% -- --
During the fourth quarter of 1994, the Company recorded merger transaction and
restructuring costs associated with the acquisition of Aldus of $14.6 million
and $57.6 million, respectively. The restructuring costs included $46.5 million
related to cash expenditures and noncash items of $25.7 million, consisting
primarily of write-offs of redundant information systems and equipment, and
duplicate product lines. As of November 25, 1994, the balance of $28.4 million
in accrued restructuring costs represents expected future cash expenditures,
most of which will be spent in 1995.
29
To execute the merger, the Company incurred transaction costs consisting
principally of transaction fees for investment bankers, attorneys, accountants,
financial printing and other related charges to negotiate the merger, conduct
financial and technical due diligence, file appropriate regulatory documents and
solicit shareholder votes.
As a result of the merger, certain technical support, customer service,
distribution and administration functions have been or will be combined and/or
reduced. Such restructuring costs include severance and outplacement charges of
$20.8 million related to approximately 500 terminated employees. Affected
employees received notification of their termination by September 9, 1994, and
final assignments are expected to be completed by the first quarter of 1995.
As a condition to the merger, effective January 1995, the Company will no longer
sell and distribute FreeHand, the illustration program previously sold and
distributed by Aldus. In addition, PhotoStyler, an image and video editing
software tool, was discontinued in the fourth quarter of 1994, as the product
competed with certain existing products of the Company. The respective
inventories and capitalized software development costs and technologies of these
duplicate product lines were written off in the fourth quarter of 1994,
resulting in a $15.0 million charge to restructuring costs.
To facilitate the operations of the Company, the combined organization migrated
to common management information systems, which resulted in a write-off of the
book value of the abandoned systems and equipment. The write-off of abandoned
systems included in restructuring costs was $10.8 million. In addition,
redundant offices in Europe, Japan, Canada and the United States will be
consolidated. Lease and third-party contract termination payments totaling $11.0
million, resulting from the planned closure of 10 facilities, are accrued as
part of the restructuring costs.
The Company is unable to determine the effects that the merger and restructuring
actions will have on future operating results and the financial condition of the
organization. In addition to the acquisition-related expenses recognized in the
restructuring charge, the Company incurred approximately $10.1 million of
certain one-time charges that were recognized in operating expenses. These
charges included writing off certain capitalized software development costs,
transition personnel bonuses, relocation expenses and expenses incurred for
integrating the two companies' benefit plans.
NONOPERATING INCOME
1994 Change 1993 Change 1992
------ ------- ------ ------- -----
INTEREST, INVESTMENT AND
OTHER INCOME $9.0 -30% $12.8 16% $11.0
Percentage of
total revenue 1.5% 2.5% 2.5%
Interest, investment and other income decreased by $3.8 million in 1994 from
1993 and increased by $1.8 million in 1993 over 1992. Interest and other income
was adversely impacted by $1.5 million in 1994, as the Company sold several
securities (acquired in the Aldus acquisition) for losses in principal created
by increases in interest rates during 1994, and for the write-off of an
investment in a privately held enterprise. Interest,
30
investment and other income in 1993 included a gain of $3.9 million on the sale
of common stock held as an investment and a $1.0 million write-off of an
investment in a privately held enterprise. While the Company's cash balances and
short-term investments have increased each year due to profitable operations and
modest expenditures for capital outlays and other investments, 1994 interest,
investment and other income would have increased approximately $0.6 million
absent the 1993 net gain on the sales of common stock and the losses experienced
in 1994. Such increase is attributable to increased levels of cash invested and
a slight increase in interest earned on the Company's investments as driven by
slight increases in prevailing interest rates.
1994 Change 1993 Change 1992
------ ------- ------ ------- -----
LOSS ON REAL ESTATE
PARTNERSHIP -- -- -- -- $6.0
Percentage of
total revenue -- -- 1.4%
The Company incurred a $6.0 million loss on a real estate partnership in 1992,
as it withdrew from this partnership, due to complications that affected the
developer's ability to finance the project and to meet specific development
timetables.
PROVISION FOR INCOME TAXES
1994 Change 1993 Change 1992
------ ------- ------ ------- -----
PROVISION FOR
INCOME TAXES $33.7 -12% $38.5 32% $29.1
Percentage of
total revenue 5.6% 7.4% 6.6%
Effective tax rate 84.2% 36.6% 36.5%
The Company's effective tax rate in 1994 increased significantly over the
effective tax rates of 1993 and 1992, due primarily to one-time, nondeductible
merger transaction and restructuring costs. An analysis of the differences
between the statutory and effective income tax rates is provided in Note 9 to
the accompanying Consolidated Financial Statements. In 1995, the Company expects
its effective tax rate to approximate that of 1993 and 1992.
31
NET INCOME AND NET INCOME PER SHARE
1994 Change 1993 Change 1992
------ ------- ------ ------ -----
NET INCOME $6.3 -91% $66.5 32% $50.4
Percentage of
total revenue 1.1% 12.8% 11.5%
NET INCOME PER SHARE $0.10 -91% $1.11 35% $0.82
Weighted shares
(in thousands) 61,620 2% 60,144 -2% 61,193
Net income for 1994 represents a 91 percent decrease from 1993 net income of
$66.5 million. Results of operations in 1994 included several one-time charges
that would not normally be included in the Company's operating results. A
reconciliation of the reported results of operations, to the results of
operations excluding these one-time charges for 1994, follows.
Income
Before Income Net
Income Tax Net Income
Taxes Provision Income Per Share
---------- ---------- --------- ---------
Reported results of operations $ 39,997 $ 33,688 $ 6,309 $ .10
Write-off of acquired in-process
research and development:
Compumation, Incorporated 3,045 -- 3,045 .05
LaserTools Corporation 12,424 -- 12,424 .20
Acquisition of Aldus:
Merger transaction costs 14,618 -- 14,618 .23
Restructuring costs 57,565 19,922 37,643 .61
Other one-time expenses
resulting from the acquisition 10,092 3,734 6,358 .10
---------- --------- --------- --------
Results of operations excluding
one-time charges $ 137,741 $ 57,344 $ 80,397 $ 1.29
---------- --------- --------- --------
---------- --------- --------- --------
Furthermore, the future effective tax rate is expected to be approximately 37
percent. Had this been in effect in 1994, the net income per share, excluding
the above one-time charges, would have been $1.39 per share.
Net income for 1993 increased 32 percent, including a $3.9 million gain on the
sale of an investment. Earnings per share were $1.11, a 35 percent increase from
1992. The one-time gain on the sale of an investment resulted in an increase in
earnings per share of $.04.
FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS
The Company believes that in the future its results of operations could be
impacted by factors such as the ability of the Company to integrate Adobe and
Aldus product lines,
32
renegotiation of royalty arrangements, delays in shipment of the Company's new
products and major new versions of existing products, market acceptance of new
products and upgrades, growth in worldwide personal computer and printer sales
and sales price adjustments, consolidation in the OEM printer business, and
adverse changes in general economic conditions in any of the countries in which
the Company does business.
In connection with the merger with Aldus, the Company has sought to reduce
combined expenses by the elimination of duplicate or unnecessary facilities,
employees, marketing programs and other expenses. The Company believes that the
major impact of such reductions occurred in the fourth quarter of 1994 but
expects some additional impact in the first quarter of 1995. The Company expects
that these reductions will benefit future operating results, but the reductions
could adversely impact the earnings of the combined company. In addition, there
can be no assurance that the integration of the product lines of the two
companies will not have a material adverse effect on the results of operations.
As previously stated, the Company will no longer market FreeHand after January
1, 1995 and has made the decision to discontinue the marketing of PhotoStyler.
These two products aggregated $53.2 million of revenue and $35.4 million of
gross profit in 1994. There can be no assurance that the Company will be able to
replace this lost revenue or that it will be able to do so as profitably.
The Company's OEM customers on occasion seek to renegotiate their royalty
arrangements. The Company evaluates these requests on a case-by-case basis. If
an agreement is not reached, a customer may decide to pursue other options,
including licensing a PostScript language compatible interpreter from a third
party, which could result in lower licensing revenue for the Company.
With the acquisition of Aldus, the Company will derive a larger portion of its
revenues from its subsidiaries located in Europe and the Pacific Rim. Certain
transactions by these subsidiaries are denominated in foreign currencies. As a
result, the Company's operating results are subject to fluctuations in foreign
currency exchange rates.
The Company's ability to develop and market products, including upgrades of
currently shipping products, that successfully adapt to current market needs may
also have an impact on the results of operations. A portion of the Company's
future revenue will come from these products. Delays in such introductions could
have an adverse effect on the Company's revenue, earnings or stock price. The
Company cannot determine the ultimate effect that these new products or upgrades
will have on its sales or results of operations.
Due to the factors noted above, the Company's future earnings and stock price
may be subject to significant volatility, particularly on a quarterly basis. Any
shortfall in revenue or earnings from levels expected by securities analysts
could have an immediate and significant adverse effect on the trading price of
the Company's common stock in any given period. Additionally, the Company may
not learn of such shortfalls until late in the fiscal quarter, which could
result in an even more immediate and adverse effect on the trading price of the
Company's common stock. Finally, the Company participates in a highly dynamic
industry, which often results in significant volatility of the Company's common
stock price.
33
FINANCIAL CONDITION
CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
1994 Change 1993 Change 1992
------ ------ ------ ------ ------
CASH, CASH EQUIVALENTS AND
SHORT-TERM INVESTMENTS $400.4 30% $309.0 34% $231.0
Cash, cash equivalents and short-term investments totaled $400.4 million as of
November 25, 1994, compared to $309.0 million as of November 26, 1993,
representing 64 percent and 58 percent of total assets, respectively. Cash
equivalents consist of highly liquid money market instruments. In 1994, the
Company adopted SFAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." In accordance with SFAS No. 115, prior period financial
statements have not been restated to reflect the change in accounting principle.
The cumulative effect of adopting SFAS No. 115 was not material to the Company's
financial position and results of operations. Certain cash equivalents and all
of the Company's short-term investments, consisting principally of municipal
bonds, commercial paper, auction rate securities, United States government and
government agency securities, and asset-backed securities, are classified as
available-for-sale under the provisions of SFAS No. 115. The securities are
carried at fair value with the unrealized gains and losses, net of tax, reported
as a separate component of shareholders' equity.
The Company's cash balances and short-term investments have increased each year
due to profitable operations, but have been offset partially by modest
expenditures for capital outlays and other investments. In 1994, growth in cash
balances and short-term investments was reduced by increased corporate merger
and acquisition activity.
NONCURRENT LIABILITIES AND SHAREHOLDERS' EQUITY
1994 Change 1993 Change 1992
------ ------ ------ ------ ------
NONCURRENT LIABILITIES AND
SHAREHOLDERS' EQUITY $456.8 9% $421.0 20% $351.7
Included above are put warrants and shareholders' equity. The Company has no
long-term debt. Shareholders' equity as of November 25, 1994 was $456.8 million,
compared to $414.1 million as of November 26, 1993.
The Company has paid cash dividends on its common stock each quarter since the
second quarter of 1988. During 1994, the Company paid cash dividends of $.20 per
common share. The Board of Directors of the Company approved a two-for-one stock
split on July 9, 1993, payable in the form of a stock dividend for shareholders
of record as of July 27, 1993, with a distribution date of August 10, 1993. All
share and per share data has been restated to reflect this stock split. The
declaration of future dividends is within the discretion of the Board of
Directors of the Company and will depend upon business conditions, results of
operations, the financial condition of the Company and other factors.
34
Under its stock repurchase program, the Company expects to continue to
repurchase shares from time to time in 1995. These share repurchases are
intended to fund the employee stock purchase and stock option plans. Until the
merger with Aldus, the Company had engaged in a regular share repurchase
program. In 1995, the Company plans to continue that regular repurchase program.
WORKING CAPITAL
1994 Change 1993 Change 1992
------ ------ ------ ------ ------
WORKING CAPITAL $363.6 14% $318.2 28% $247.9
Net working capital grew to $363.6 million as of November 25, 1994, compared to
$318.2 million as of November 26, 1993. Cash flows provided by operations during
1994 was $142.5 million. Cash generated from operations has been sufficient to
fund the Company's investment in research and development, and sales and
marketing activities.
Expenditures for property and equipment totaled $28.5 million. Such expenditures
are expected to continue, including computer systems for development, sales and
marketing, product support, and administrative staff. In addition, in 1994 the
Company paid approximately $14.8 million, net of cash acquired, to acquire
LaserTools Corporation, Compumation, Incorporated, Image Club Graphics,
Incorporated, and the remaining 20 percent interest in Aldus K.K. In the future,
additional cash may be used to acquire software products or technologies
complementary to the Company's business. Net cash provided by financing
activities during 1994 was $25.0 million, primarily resulting from the issuance
of common stock under employee stock plans.
The Company's principal commitments as of November 25, 1994 consisted of
obligations under operating leases, a real estate development agreement, and
various service and lease guarantee agreements with a related party. In 1994,
the Company entered into a real estate development agreement for the
construction of an office facility and in 1996 will enter into an operating
lease agreement for this facility. The Company will have the option to purchase
the facility at the end of the lease term. In the event the Company chooses not
to exercise this option, the Company is obligated to arrange the sale of the
facility to an unrelated party and is required to pay the lessor any difference
between the net sales proceeds and the lessor's net investment in the facility,
in an amount not to exceed that which would preclude classification of the lease
as an operating lease, approximately $52.0 million. The Company also is
required, periodically during the construction period, to deposit funds with the
lessor to secure the performance of its obligations under the lease and as of
November 25, 1994, the Company had deposited approximately $2.3 million in
securities. Also during 1994, the Company entered into various agreements with
McQueen Holdings Limited ("McQueen") whereby the Company has agreed to guarantee
obligations under operating leases for certain facilities utilized by McQueen,
and to guarantee certain levels of business between Adobe and McQueen. The
Company currently owns 10 percent of the outstanding stock in McQueen as a
result of the merger with Aldus.
35
The Company believes that existing cash, cash equivalents and short-term
investments, together with cash generated from operations, will provide
sufficient funds for the Company to meet its operating cash requirements in the
foreseeable future.
36
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FINANCIAL STATEMENTS
The Company's financial statements required by this item are submitted as a
separate section of this Form 10-K. See Item 14.(a)1. for a listing of financial
statements provided in the section titled "FINANCIAL STATEMENTS".
SUPPLEMENTARY DATA
The following tables (presented in thousands, except per share amounts) set
forth quarterly supplementary data for each of the years in the two-year period
ended November 25, 1994. and reflect the results of the Company as restated to
reflect the merger of the Company and Aldus Corporation in 1994, which was
accounted for as a pooling of interests. Share and per share amounts have been
adjusted for a two-for-one stock split, effective July 1993.
1994
---------------------------------------------------------------------
Unaudited
Quarter Ended Audited
------------------------------------------------------ Year
Feb. 25 May 27 Aug. 26 Nov. 25 Ended
1994 1994 1994 1994 Nov. 25
--------- --------- --------- --------- ---------
Revenue $ 135,892 $ 149,793 $ 146,637 $ 165,450 $ 597,772
Gross margin 109,887 121,899 120,475 133,701 485,962
Merger transaction and
restructuring costs -- -- -- 72,183 72,183
Income (loss) before
income taxes 29,941 27,453 28,752 (46,149) 39,997
Net income (loss) 19,093 17,306 18,061 (48,151) 6,309
Net income (loss)
per share .31 .28 .29 (.79) .10
Shares used in computing
net income (loss)
per share 61,289 61,768 62,566 60,856 61,620
1993
----------------------------------------------------------------------
Unaudited
Quarter Ended Audited
------------------------------------------------------- Year
Feb. 26 May 28 Aug. 27 Nov. 26 Ended
1993 1993 1993 1993 Nov. 26
---------- ---------- --------- ---------- ----------
Revenue $ 110,113 $ 125,254 $ 140,942 $ 143,928 $ 520,237
Gross margin 89,760 102,463 115,547 115,829 423,599
Income before
income taxes 25,633 23,983 24,941 30,503 105,060
Net income 15,824 14,672 15,623 20,426 66,545
Net income per share .27 .24 .26 .34 1.11
Shares used in computing
net income per share 59,530 60,003 60,758 60,231 60,144
37
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
There were no disagreements on any matter of accounting principles, financial
statement disclosure, or auditing scope or procedure to be reported under this
item.
38
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
Information with respect to Directors may be found in the section captioned
"Election of Directors" appearing in the definitive Proxy Statement to be
delivered to shareholders in connection with the Annual Meeting of Shareholders
to be held on April 5, 1995. Such information is incorporated herein by
reference.
EXECUTIVE OFFICERS
The executive officers of the Company as of February 13, 1995 are as follows:
Name Age Positions
- - ---------------------- -------- ----------------------------
John E. Warnock 54 Chairman of the Board and
Chief Executive Officer
Charles M. Geschke 55 President, Chief Operating Officer
and Director
Derek J. Gray 45 Senior Vice President and General
Manager, Adobe Europe
Stephen A. MacDonald 49 Senior Vice President and General
Manager, Systems Products Division
M. Bruce Nakao 51 Senior Vice President, Finance and
Administration, Chief Financial
Officer, Treasurer and Assistant
Secretary
David B. Pratt 55 Senior Vice President and General
Manager, Application Products
Division
Colleen M. Pouliot 36 Vice President, General Counsel and
Secretary
A biography of the principal occupations for the past five years of each of the
executive officers is provided below.
Dr. Warnock was a founder of the Company and has been its Chairman of the Board
since April 1989. He has been a director and Chief Executive Officer since 1982
and was its President from December 1982 through March 1989. From April 1978
until founding the Company, Dr. Warnock was Principal Scientist of the Imaging
Sciences Laboratory at Xerox Corporation s Palo Alto Research Center. Dr.
Warnock received a Ph.D. in electrical engineering from the University of Utah.
Dr. Geschke was a founder of the Company and has been its President since April
1989.
39
He has been a director since 1982, Chief Operating Officer since December 1986,
and was Executive Vice President from December 1982 through March 1989. Dr.
Geschke also served as the Company's Secretary from December 1982 until
September 1987. From October 1972 until founding the Company, Dr. Geschke was
the Manager of the Imaging Sciences Laboratory at Xerox Corporation's Palo Alto
Research Center. Dr. Geschke received a Ph.D. in computer science from Carnegie-
Mellon University.
Mr. Gray joined the Company upon the closing of the acquisition of Aldus in
August 1994. Prior to that time, Mr. Gray served as Managing Director of Aldus
Europe Limited since 1986. Mr. Gray is a co-founder and, for the ten years prior
to joining Aldus, Managing Director of McQueen Holdings Limited, a distributor
of computer hardware and software, of which the Company is a 10 percent
shareholder by virtue of the acquisition of Aldus.
Mr. MacDonald joined the Company in May 1983 as Vice President. In August 1989,
he was promoted to Senior Vice President. From February 1972 until he joined the
Company, Mr. MacDonald was a Marketing Manager for Hewlett-Packard Company.
Mr. Nakao joined the Company in May 1986 and was elected Vice President, Chief
Financial Officer, Treasurer and Assistant Secretary in June 1986. In December
1992, he was promoted to Senior Vice President. From February 1982 to May 1986,
Mr. Nakao was Vice President, Chief Financial Officer, Treasurer and Assistant
Secretary of Ross Systems, Inc. From January 1980 to February 1982, Mr. Nakao
was Vice President, Chief Financial Officer and Treasurer of Dividend
Industries, Inc.
Mr. Pratt joined the Company in May 1988 as General Manager of the Application
Products Division. In August 1989, he was promoted to Vice President. In
September 1992, he was promoted to Senior Vice President. From October 1987 to
April 1988, Mr. Pratt was Executive Vice President and Chief Operating Officer
of Logitech Corporation. From May 1986 to June 1987, Mr. Pratt was Senior Vice
President and Chief Operating Officer of Quantum Corporation. From March 1982
through January 1986, Mr. Pratt was President and Chief Executive Officer of
Boschert Incorporated.
Ms. Pouliot joined the Company in July 1988 as Associate General Counsel and
became the Corporate Secretary in April 1989. In December 1990, she was promoted
to General Counsel. In December 1992, she was promoted to Vice President. Ms.
Pouliot was an associate at the law firm of Ware & Freidenrich from November
1983 until she joined the Company.
40
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to this item may be found in the section captioned
"Executive Compensation" appearing in the definitive Proxy Statement to be
delivered to shareholders in connection with the Annual Meeting of Shareholders
to be held on April 5, 1995. Such information is incorporated herein by
reference.
41
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Information with respect to this item may be found in the section captioned
"Security Ownership of Certain Beneficial Owners and Management" appearing in
the definitive Proxy Statement to be delivered to shareholders in connection
with the Annual Meeting of Shareholders to be held April 5, 1995. Such
information is incorporated herein by reference.
42
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with respect to this item may be found in the section captioned
"Certain Transactions" appearing in the definitive Proxy Statement to be
delivered to shareholders in connection with the Annual Meeting of Shareholders
to be held April 5, 1995. Such information is incorporated herein by reference.
43
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) Documents filed as part of this report
1. Financial statements
Sequentially
Numbered
Financial Statement Description Page
---------------------------------------- ------------
* Management's Report 57
* Independent Auditors' Report 58
* Consolidated Balance Sheets 59
November 25, 1994 and November 26, 1993
* Consolidated Statements of Income 61
Years Ended November 25, 1994, November 26, 1993,
and November 27, 1992
* Consolidated Statements of Shareholders' Equity 62
Years Ended November 25 1994, November 26, 1993,
and November 27, 1992
* Consolidated Statements of Cash Flows 65
Years Ended November 25, 1994, November 26, 1993,
and November 27, 1992
* Notes to Consolidated Financial Statements 68
* Report of Ernst & Young LLP, Independent Auditors 95
44
2. Financial statement schedule
Sequentially
Schedule Numbered
Number Financial Statement Schedule Description Page
--------- ---------------------------------------- ------------
Schedule II Valuation and Qualifying Accounts 97
Other financial statement schedules have been omitted since they are either
not required, not applicable, or the required information is shown in the
consolidated financial statements or notes thereto.
45
3.Exhibits
Sequentially Incorporated By Reference
Exhibit Numbered ----------------------------
Number Exhibit Description Page Form Date Number
- - ------ -------------------------- ---------- -------- --------- -------
3.1 Articles of Incorporation, N/A S-1 07/01/86 3.1
as amended
3.1.1 Amended and Restated N/A 10-K 11/30/88 3.1.1
Articles of Incorporation
3.1.2 Certificate of Amend- N/A 10-K 11/30/88 3.1.2
ment of Articles of
Incorporation
3.1.3 Certificate of Amend- N/A 10-K 11/29/91 3.1.3
ment of Articles of
Incorporation
3.1.4 Certificate of Amend- N/A 10-K 11/26/93 3.1.4
ment of Articles of
Incorporation
3.2 Bylaws as amended N/A S-1 07/01/86 3.2
3.2.1 Bylaws as amended N/A 10-K 11/30/88 3.2.1
3.2.2 Bylaws as amended N/A 10-K 11/30/90 3.2.2
3.2.3 Restated Bylaws N/A 10-K 11/29/91 3.2.3
3.2.4 Restated Bylaws N/A 10-K 11/27/93 3.2.4
3.2.5 Restated Bylaws N/A 10-K 11/26/93 3.2.5
3.2.6 Restated Bylaws 99 N/A N/A N/A
10.1 1984 Stock Option Plan N/A S-1 07/01/86 10.1
10.1.1 1984 Stock Option Plan, N/A 10-K 11/30/87 10.1.1
as amended
10.1.2 1984 Stock Option Plan, N/A 10-K 11/30/88 10.1.2
as amended
10.1.3 1984 Stock Option Plan, N/A 10-K 11/30/89 10.1.3
as amended
10.1.4 1984 Stock Option Plan, N/A 10-K 11/30/90 10.1.4
as amended
10.1.5 1984 Stock Option Plan, N/A 10-K 11/27/92 10.1.5
as amended
10.1.6 1984 Stock Option Plan, N/A 10-Q 07/02/93 10.1.6
as amended
10.1.7 1994 Stock Option Plan N/A 10-Q 05/27/94 10.1.7
(Continued)
46
3. Exhibits (Continued)
Sequentially Incorporated By Reference
Exhibit Numbered ----------------------------
Number Exhibit Description Page Form Date Number
- - ------ -------------------------- ---------- -------- --------- -------
10.2 Common Stock Purchase N/A S-1 07/01/86 10.2
Agreement of John E.
Warnock dated December
29, 1982, and, as amended
November 30, 1983
10.3 Common Stock Purchase N/A S-1 07/01/86 10.3
Agreement of Charles M.
Geschke dated December
29, 1982, and, as amended
November 30, 1983
10.4 Common Stock Purchase N/A S-1 07/01/86 10.4
Agreement of Q.T. Wiles
dated December 29, 1982
10.5 Common Stock Purchase N/A S-1 07/01/86 10.5
Agreement of David Evans
dated December 29, 1982
10.6 Common Stock Purchase N/A S-1 07/01/86 10.6
Agreement of William
Hambrecht dated December
29, 1982
10.7 Exchange Agreement N/A S-1 07/01/86 10.7
dated December 29,
1983, for John E.
Warnock
10.8 Exchange Agreement N/A S-1 07/01/86 10.8
dated December 29,
1983, for Charles M.
Geschke
10.9 Form of Shareholders N/A S-1 07/01/86 10.9
Exchange Agreement used
in connection with the
exchange of shares of Old
Adobe for shares of the
Company
(Continued)
47
3. Exhibits (Continued)
Sequentially Incorporated By Reference
Exhibit Numbered ----------------------------
Number Exhibit Description Page Form Date Number
- - ------ -------------------------- ---------- -------- --------- -------
10.10 Form of Agreement for N/A S-1 07/01/86 10.10
Assignment of Limited
Partnership Interest used
in connection with exchange
of limited partnership
interests in Adobe Systems
Limited, a California limited
partnership, for shares of the
Series B Preferred Stock of
the Company
10.11 Registration Rights N/A S-1 07/01/86 10.11
Agreement dated December
29, 1983
10.12 Old Adobe's 1983 Stock N/A S-1 07/01/86 10.12
Purchase Plan and the
Company's 1984 Stock
Purchase Plan with standard
form of Stock Purchase
Agreement
10.12.1 1988 Employee Stock N/A 10-Q 07/06/94 10.12.1
Purchase Plan, as amended
10.13 Form of Employee N/A S-1 07/01/86 10.13
Common Stock Purchase
Agreement dated July 23,
1984
10.14 Warrant to Purchase Series N/A S-1 07/01/86 10.14
C Preferred Stock to Apple
Computer, Inc., dated
November 26, 1984, with
executed subscription form
dated November 28, 1984
10.15 Warrant to Purchase N/A S-1 07/01/86 10.15
Series C Preferred Stock
to Evans & Sutherland
Computer Corporation
dated April 25, 1984,
with executed subscription
form dated June 19, 1986
(Continued)
48
3. Exhibits (Continued)
Sequentially Incorporated By Reference
Exhibit Numbered ----------------------------
Number Exhibit Description Page Form Date Number
- - ------ -------------------------- ---------- -------- --------- -------
10.16 License Agreement N/A S-1 07/01/86 10.16
between the Company
and Evans & Sutherland
Computer Corporation
dated April 25, 1984
10.17 License Agreement N/A S-1 07/01/86 10.17
between the Company and
Apple Computer, Inc., dated
November 12, 1985
(confidential treatment
granted)
10.17.1 License Agreement N/A 10-K 11/30/88 10.17.1
Restatement between the
Company and Apple
Computer, Inc., dated April
1, 1987 (confidential
treatment granted)
10.17.2 Amendment No. 1 to the N/A 10-K 11/30/90 10.17.2
License Agreement
Restatement between the
Company and Apple
Computer, Inc., dated
November 27, 1990
(confidential treatment
granted).
10.18 Lease Agreement dated N/A S-1 07/01/86 10.18
November 11, 1983,
between Mozart Family
Trust and Epson America
Inc.
10.19 Assignment of Lease N/A S-1 07/01/86 10.19
dated November 11, 1983,
between Epson America
Inc. and the Company
dated February 1, 1986
10.20 Lease Agreement N/A S-1 07/01/86 10.20
between Mozart Family
Trust and the Company
dated November 30, 1983
(Continued)
49
3. Exhibits (Continued)
Sequentially Incorporated By Reference
Exhibit Numbered ----------------------------
Number Exhibit Description Page Form Date Number
- - ------ -------------------------- ---------- -------- --------- -------
10.21 Bonus Plans N/A S-1 07/01/86 10.21
10.21.1 Revised Bonus Plan N/A 10-K 11/27/92 10.21.1
10.21.2 Revised Bonus Plan N/A 10-K 11/26/93 10.21.2
10.22 Restricted Stock Option N/A 10-K 11/30/87 10.22
Plan
10.22.1 Restricted Stock Option N/A 10-K 11/30/89 10.22.1
Plan, as amended
10.22.2 Restricted Stock Option N/A 10-K 11/30/90 10.22.2
Plan as, amended
10.22.3 Restricted Stock Option N/A 10-K 11/29/91 10.22.3
Plan as, amended
10.22.4 Restricted Stock Option N/A 10-Q 07/06/94 10.22.4
Plan as, amended
10.23 Amended and Restated N/A 10-K 11/30/88 10.23
Software License Agree-
ment between the Company
and QMS, Inc., dated May
15, 1987 (confidential
treatment granted)
10.24 1989 Restricted Stock Plan N/A 10-K 11/30/88 10.24
10.24.1 1994 Performance and N/A S-4 07/27/94 10.1
Restricted Stock Plan
10.25 Form of Indemnity Agree- N/A 10-K 11/30/88 10.25
ment
10.26 Lease Agreement by and N/A 10-K 11/30/88 10.26
between Charleston Place
Associates and Adobe
Systems Incorporated dated
April 14, 1987
10.26.1 Amendment One to Lease N/A 10-K 11/30/88 10.26.1
Agreement dated March 1,
1988
10.26.2 Amendment Two to Lease N/A 10-K 11/30/88 10.26.2
Agreement dated
September 1, 1988
(Continued)
50
3. Exhibits (Continued)
Sequentially Incorporated By Reference
Exhibit Numbered ----------------------------
Number Exhibit Description Page Form Date Number
- - ------ -------------------------- ---------- -------- --------- -------
10.27 Lease Agreement by and N/A 10-K 11/30/88 10.27
between John Mozart and
Adobe Systems
Incorporated dated July
20, 1988
10.28 Limited Partnership N/A 10-K 11/29/91 10.28
Agreement of University
Circle Building I, Ltd.,
dated May 22, 1991
10.29 University Centre N/A 10-K 11/29/91 10.29
Building I Lease Agree-
ment dated May 22, 1991
10.30 University Circle N/A 10-K 11/27/92 10.30
Termination and Security
Agreement and Mutual
Release dated January 7,
1993
10.31 Restated Agreement and N/A S-4 07/13/94 10.31
and Plan of Merger and
Reorganization By and
Among Adobe Systems
Incorporated, P Acquisition
Corp and Aldus
Corporation
10.32 Sublease of the Land and 126 N/A N/A N/A
Lease of the Improvements
By and Between Sumitomo
Bank Leasing and Finance
Inc. and Adobe Systems
Incorporated
11 Computation of Earnings 193 N/A N/A N/A
Per Common Share
21 Subsidiaries of the 194 N/A N/A N/A
Registrant
23 Consent of Independent 195 N/A N/A N/A
Auditors
23.1 Consent of Ernst & 196 N/A N/A N/A
Young LLP, Independent
Auditors
27 Financial Data Schedule 197 N/A N/A N/A
51
(b) Reports on Form 8-K
One report on Form 8-K dated August 31, 1994 was filed by the Company
describing the completion of the acquisition of Aldus Corporation.
52
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Mountain
View, California, on the 13th day of February, 1995.
ADOBE SYSTEMS INCORPORATED
By /s/ M. Bruce Nakao
-------------------------------------
M. Bruce Nakao,
Senior Vice President, Finance and
Administration, Chief Financial Officer,
Treasurer and Assistant Secretary
(Principal Financial and Accounting
Officer)
(Continued)
53
SIGNATURES
(CONTINUED)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated on the 13th day of February 1995.
Signature Title
- - --------------------------------- -----------------------------------
/s/ John E. Warnock Chairman of the Board of Directors
- - --------------------------------- and Chief Executive Officer
John E. Warnock (Principal Executive Officer)
/s/ Charles M. Geschke President, Chief Operating Officer
- - --------------------------------- and Director
Charles M. Geschke (Principal Operating Officer)
/s/ William R. Hambrecht Director
- - ---------------------------------
William R. Hambrecht
/s/ Robert Sedgewick Director
- - ---------------------------------
Robert Sedgewick
/s/ Delbert W. Yocam Director
- - ---------------------------------
Delbert W. Yocam
/s/ William J. Spencer Director
- - ---------------------------------
William J. Spencer
/s/ Paul Brainerd Director
- - ---------------------------------
Paul Brainerd
/s/ Gene P. Carter Director
- - ---------------------------------
Gene P. Carter
/s/ M. Bruce Nakao Senior Vice President, Finance and
- - --------------------------------- Administration, Chief Financial Officer,
M. Bruce Nakao Treasurer and Assistant Secretary
(Principal Financial and Accounting
Officer)
54
SUMMARY OF TRADEMARKS
The following trademarks of Adobe Systems Incorporated or its subsidiaries,
which may be registered in certain jurisdictions, are referenced in this
Form 10-K:
Acrobat
Adobe
Adobe Dimensions
Adobe Home Publisher
Adobe Illustrator
Adobe Photoshop
Adobe Premiere
Adobe Streamline
Adobe Type Manager
After Effects
Aldus
Color Central
DateBook
Display PostScript
Fetch
Gallary Effects
IntelliDraw
PageMaker
Persuasion
Photostyler
PostScript
PrePrint
PressWise
Print Central
SuperPaint
TouchBase
TrapWise
SuperATM
All other brand or product names are trademarks or registered trademarks of
their respective holders.
55
FINANCIAL STATEMENTS
As required under Item 8. Financial Statements and Supplementary Data, the
consolidated financial statements of the Company are provided in this separate
section. The consolidated financial statements included in this section are as
follows:
Sequentially
Numbered
Financial Statement Description Page
- - ------------------------------------------------------------- --------------
* Management's Report 57
* Independent Auditors' Report 58
* Consolidated Balance Sheets 59
November 25, 1994 and November 26, 1993
* Consolidated Statements of Income 61
Years Ended November 25, 1994, November 26, 1993,
and November 27, 1992
* Consolidated Statements of Shareholders' Equity 62
Years Ended November 25, 1994, November 26, 1993,
and November 27, 1992
* Consolidated Statements of Cash Flows 65
Years Ended November 25, 1994, November 26, 1993,
and November 27, 1992
* Notes to Consolidated Financial Statements 68
* Report of Ernst & Young LLP, Independent Auditors 95
56
MANAGEMENT'S REPORT
Management is responsible for all the information and representations contained
in the consolidated financial statements and other sections of this FORM 10-K.
Management believes that the consolidated financial statements have been
prepared in conformity with generally accepted accounting principles appropriate
in the circumstances to reflect in all material respects the substance of events
and transactions that should be included, and that the other information in this
FORM 10-K is consistent with those statements. In preparing the consolidated
financial statements, management makes informed judgments and estimates of the
expected effects of events and transactions that are currently being accounted
for.
In meeting its responsibility for the reliability of the consolidated financial
statements, management depends on the Company's system of internal accounting
control. This system is designed to provide reasonable assurance that assets are
safeguarded and transactions are executed in accordance with management's
authorization, and are recorded properly to permit the preparation of
consolidated financial statements in accordance with generally accepted
accounting principles. In designing control procedures, management recognizes
that errors or irregularities may nevertheless occur. Also, estimates and
judgments are required to assess and balance the relative cost and expected
benefits of the controls. Management believes that the Company's accounting
controls provide reasonable assurance that errors or irregularities that could
be material to the consolidated financial statements are prevented or would be
detected within a timely period by employees in the normal course of performing
their assigned functions.
The Board of Directors pursues its oversight role for these consolidated
financial statements through the Audit Committee, which is comprised solely of
Directors who are not officers or employees of the Company. The Audit Committee
meets with management periodically to review their work and to monitor the
discharge of each of their responsibilities. The Audit Committee also meets
periodically with KPMG Peat Marwick LLP, the independent auditors who have free
access to the Audit Committee or the Board of Directors, without management
present, to discuss internal accounting control, auditing and financial
reporting matters.
KPMG Peat Marwick LLP is engaged to express an opinion on our consolidated
financial statements. Their opinion is based on procedures believed by them to
be sufficient to provide reasonable assurance that the consolidated financial
statements are not materially misleading and do not contain material errors.
M. Bruce Nakao
Senior Vice President, Finance and Administration,
Chief Financial Officer, Treasurer and Assistant Secretary
December 20, 1994
57
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of Adobe Systems Incorporated:
We have audited the accompanying consolidated balance sheets of Adobe Systems
Incorporated and subsidiaries as of November 25, 1994, and November 26, 1993 and
the related consolidated statements of income, shareholders' equity, and cash
flows for each of the years in the three-year period ended November 25, 1994. In
connection with our audits of the consolidated financial statements, we also
have audited the financial statement schedule as listed in the accompanying
index. These consolidated financial statements and financial statement schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements and financial
statement schedule based on our audits. We did not audit the financial
statements of Aldus Corporation, a company acquired by the Company in a business
combination accounted for as a pooling of interests, as described in Note 2 to
the consolidated financial statements, which statements reflect total assets
constituting 33 percent as of November 26, 1993, and total revenues constituting
40 percent in both fiscal 1993 and 1992, of the related consolidated totals.
Those statements were audited by other auditors whose report has been furnished
to us, and our opinion, insofar as it relates to the amounts included for Aldus
Corporation, is based solely upon the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Adobe Systems Incorporated and
subsidiaries as of November 25, 1994, and November 26, 1993, and the results of
their operations and their cash flows for each of the years in the three-year
period ended November 25, 1994, in conformity with generally accepted accounting
principles. Also in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
KPMG Peat Marwick LLP
San Jose, California
December 20, 1994
58
ADOBE SYSTEMS INCORPORATED
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
November 25 November 26
1994 1993
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 190,091 $ 134,039
Short-term investments 210,269 174,946
Receivables 96,585 84,864
Inventories 9,619 10,779
Other current assets 7,837 9,821
Deferred income taxes 17,962 12,598
----------- -----------
Total current assets 532,363 427,047
Property and equipment 39,104 49,135
Other assets 45,561 53,124
Deferred income taxes 8,475 534
----------- -----------
$ 625,503 $ 529,840
----------- -----------
----------- -----------
(Continued)
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
59
ADOBE SYSTEMS INCORPORATED
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(CONTINUED)
November 25 November 26
1994 1993
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade and other payables $ 30,840 $ 20,925
Accrued expenses 79,000 59,114
Accrued restructuring costs 28,457 --
Income taxes payable 23,083 21,189
Deferred revenue 7,352 7,604
----------- -----------
Total current liabilities 168,732 108,832
----------- -----------
Put warrants -- 6,906
Shareholders' equity:
Preferred stock, no par value;
2,000,000 shares authorized;
none issued -- --
Common stock, no par value;
200,000,000 shares authorized;
61,150,049 and 58,651,027 shares issued
and outstanding as of November 25, 1994
and November 26, 1993, respectively 142,207 90,199
Unrealized losses on investments (1,088) --
Retained earnings 319,704 328,207
Cumulative foreign currency translation adjustments (4,052) (4,304)
----------- -----------
Total shareholders' equity 456,771 414,102
----------- -----------
$ 625,503 $ 529,840
----------- -----------
----------- -----------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
60
ADOBE SYSTEMS INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Years Ended
------------------------------------------
November 25 November 26 November 27
1994 1993 1992
----------- ----------- ----------
Revenue:
Licensing $ 156,652 $ 146,176 $ 152,701
Application products 441,120 374,061 287,362
----------- ----------- ----------
Total revenue 597,772 520,237 440,063
Direct costs 111,810 96,638 87,871
----------- ----------- ----------
Gross margin 485,962 423,599 352,192
----------- ----------- ----------
Operating expenses:
Software development costs:
Research and development 98,995 86,727 65,181
Amortization of capitalized software
development costs 13,316 10,208 10,128
Sales, marketing and customer
support 200,993 170,945 145,748
General and administrative 54,021 59,203 50,344
Write-off of acquired in-process
research and development 15,469 4,285 6,325
Merger transaction and
restructuring costs 72,183 -- --
----------- ----------- ----------
Total operating expenses 454,977 331,368 277,726
----------- ----------- ----------
Operating income 30,985 92,231 74,466
Nonoperating income (expense):
Interest, investment and other income 9,012 12,829 10,982
Loss on real estate partnership -- -- (6,000)
----------- ----------- ----------
Income before income taxes 39,997 105,060 79,448
Income tax provision 33,688 38,515 29,059
----------- ----------- ----------
Net income $ 6,309 $ 66,545 $ 50,389
----------- ----------- ----------
----------- ----------- ----------
Net income per share $ 0.10 $ 1.11 $ 0.82
----------- ----------- ----------
----------- ----------- ----------
Shares used in computing net
income per share 61,620 60,144 61,193
----------- ----------- ----------
----------- ----------- ----------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
61
ADOBE SYSTEMS INCORPORATED
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
Cumulative
Foreign
Commom Stock Unrealized Currency
-------------------------- Losses on Retained Translation
Shares Amount Investments Earnings Adjustments Total
---------- ---------- ----------- ---------- ----------- ----------
Balances as of
November 29, 1991 59,049,328 $ 108,713 $ -- $ 227,486 $ 1,880 $ 338,079
Issuance of common
stock under Stock
Option Plans 977,271 9,406 -- -- -- 9,406
Issuance of common
stock under Employee
Stock Purchase Plan 420,154 5,721 -- -- -- 5,721
Issuance of common
stock under Restricted
Stock Plans 68,360 -- -- -- -- --
Tax benefit from
employee stock plans -- 6,545 -- -- -- 6,545
Restricted stock
compensation expense -- 2,278 -- -- -- 2,278
Dividends declared -- -- -- (7,208) -- (7,208)
Repurchase of common
stock (2,776,670) (47,744) -- -- -- (47,744)
Foreign currency
translation adjustment -- -- -- -- (5,723) (5,723)
Net income -- -- -- 50,389 -- 50,389
---------- ---------- ---------- ---------- ---------- ----------
Balances as of
November 27, 1992 57,738,443 84,919 -- 270,667 (3,843) 351,743
(Continued)
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
62
ADOBE SYSTEMS INCORPORATED
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
(CONTINUED)
Cumulative
Foreign
Commom Stock Unrealized Currency
-------------------------- Losses on Retained Translation
Shares Amount Investments Earnings Adjustments Total
---------- ---------- ----------- ---------- ----------- ----------
Balances as of
November 27, 1992 57,738,443 $ 84,919 $ -- $ 270,667 $ (3,843) $ 351,743
Issuance of common
stock under Stock
Option Plans 1,371,387 15,715 -- -- -- 15,715
Issuance of common
stock under Employee
Stock Purchase Plan 510,461 6,980 -- -- -- 6,980
Issuance of common
stock under Restricted
Stock Plans 50,300 -- -- -- -- --
Tax benefit from
employee stock plans -- 10,134 -- -- -- 10,134
Restricted stock
compensation expense -- 1,651 -- -- -- 1,651
Dividends declared -- -- -- (9,005) -- (9,005)
Acquisition of The
Company of Science
& Art 105,049 2,545 -- -- -- 2,545
Repurchase of common
stock (1,124,613) (25,533) -- -- -- (25,533)
Proceeds from sales of
put warrants -- 694 -- -- -- 694
Reclassification of put
warrant obligations -- (6,906) -- -- -- (6,906)
Foreign currency
translation adjustment -- -- -- -- (461) (461)
Net income -- -- -- 66,545 -- 66,545
---------- ---------- ---------- ---------- ---------- ----------
Balances as of
November 26, 1993 58,651,027 90,199 -- 328,207 (4,304) 414,102
(Continued)
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
63
ADOBE SYSTEMS INCORPORATED
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
(CONTINUED)
Cumulative
Foreign
Commom Stock Unrealized Currency
-------------------------- Losses on Retained Translation
Shares Amount Investments Earnings Adjustments Total
---------- ---------- ----------- ---------- ----------- ----------
Balances as of
November 26, 1993 58,651,027 $ 90,199 $ -- $ 328,207 $ (4,304) $ 414,102
Issuance of common
stock under Stock
Option Plans 2,331,438 34,962 -- -- -- 34,962
Issuance of common
stock under Employee
Stock Purchase Plan 629,992 9,487 -- -- -- 9,487
Issuance of common
stock under Restricted
Stock Plans 53,500 -- -- -- -- --
Tax benefit from
employee stock plans -- 12,418 -- -- -- 12,418
Restricted stock
compensation expense -- 1,064 -- -- -- 1,064
Adjustment for change
in Aldus Corporation
fiscal year-end (130,534) (3,265) -- (4,394) 487 (7,172)
Dividends declared -- -- -- (10,418) -- (10,418)
Repurchase of common
stock (385,374) (10,283) -- -- -- (10,283)
Proceeds from sales of
put warrants -- 719 -- -- -- 719
Reclassification of put
warrant obligations -- 6,906 -- -- -- 6,906
Unrealized losses on
investments -- -- (1,088) -- -- (1,088)
Foreign currency
translation adjustment -- -- -- -- (235) (235)
Net income -- -- -- 6,309 -- 6,309
---------- ---------- ----------- ----------- ----------- -----------
Balances as of
November 25, 1994 61,150,049 $ 142,207 $ (1,088) $ 319,704 $ (4,052) $ 456,771
---------- ---------- ----------- ----------- ----------- -----------
---------- ---------- ----------- ----------- ----------- -----------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
64
ADOBE SYSTEMS INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Years Ended
-----------------------------------------
November 25 November 26 November 27
1994 1993 1992
----------- ----------- -----------
Cash flows from operating activities:
Net income $ 6,309 $ 66,545 $ 50,389
Adjustments to reconcile net income
to net cash provided by operating
activities:
Restricted stock compensation
expense 1,064 1,651 2,278
Depreciation and amortization 53,207 45,566 37,130
Deferred income taxes (12,505) (1,178) (11,539)
Unrealized loss on investments -- (113) (509)
Provision for losses on accounts
receivable 1,518 1,842 862
Tax benefit from employee stock
plans 12,418 10,134 6,545
Write-off of acquired in-process
research and development 15,469 4,285 6,325
Loss on real estate partnership -- -- 6,000
Non-cash restructuring costs 25,735 -- --
Changes in operating assets and
liabilities:
Receivables (14,965) (15,631) (10,134)
Inventories 1,004 (85) (190)
Other current assets 669 (1,143) (132)
Trade and other payables 11,720 7,866 6,397
Accrued expenses 10,915 10,277 6,698
Accrued restructuring costs 28,457 -- --
Income taxes payable 1,495 11,134 16,821
Deferred revenue -- 590 2,896
----------- ----------- -----------
Net cash provided by operating
activities 142,510 141,740 119,837
----------- ----------- -----------
(Continued)
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
65
ADOBE SYSTEMS INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(CONTINUED)
Years Ended
--------------------------------------------
November 25 November 26 November 27
1994 1993 1992
-------------- ----------- -----------
Cash flows from investing activities:
Purchases of short-term investments $ (1,734,357) $ (698,334) $ (739,082)
Maturities and sales of short-term
investments 1,697,993 671,064 723,277
Acquisitions of property and
equipment (28,526) (22,984) (29,022)
Capitalization of software
development costs (9,133) (11,573) (9,821)
Additions to other assets (17,813) (4,904) (11,340)
Acquisitions, net of cash acquired (14,750) (4,554) (12,271)
-------------- ----------- -----------
Net cash used for investing activities (106,586) (71,285) (78,259)
-------------- ----------- -----------
Cash flows from financing activities:
Proceeds from issuance of common
stock 44,449 14,045 9,516
Proceeds from sales of put warrants 719 694 --
Repurchase of common stock (10,283) (25,533) (47,744)
Payment of dividends (9,906) (8,523) (7,212)
-------------- ----------- -----------
Net cash provided by (used for)
financing activities 24,979 (19,317) (45,440)
Effect of foreign currency exchange rates
on cash and cash equivalents (1,297) (516) (4,023)
-------------- ----------- -----------
Net increase (decrease) in cash
and cash equivalents 59,606 50,622 (7,885)
Adjustment for change in Aldus
Corporation fiscal year-end (3,554) -- --
Cash and cash equivalents at beginning
of year 134,039 83,417 91,302
-------------- ----------- -----------
Cash and cash equivalents at end
of year $ 190,091 $ 134,039 $ 83,417
-------------- ----------- -----------
-------------- ----------- -----------
(Continued)
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
66
ADOBE SYSTEMS INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(CONTINUED)
Years Ended
November 25 November 26 November 27
-----------------------------------------
1994 1993 1992
----------- ----------- -----------
Supplemental disclosures:
Cash paid during the year for
income taxes $ 25,945 $ 21,999 $ 16,525
----------- ----------- -----------
----------- ----------- -----------
Noncash investing and financing
activities:
Dividends declared but not paid $ 2,778 $ 2,262 $ 1,780
----------- ----------- -----------
----------- ----------- -----------
Reclassification of put warrants $ (6,906) $ 6,906 $ --
----------- ----------- -----------
----------- ----------- -----------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
67
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 1.
SIGNIFICANT ACCOUNTING POLICIES
OPERATIONS
Founded in 1982, Adobe Systems Incorporated ("Adobe" or the "Company") develops,
markets and supports computer software products and technologies that enable
users to create, display, print and communicate electronic documents. The
Company licenses its technology to major computer and publishing suppliers, and
markets application software products and typeface products for authoring and
editing visually rich documents, including digital and video output. The Company
distributes its products through a network of original equipment manufacturer
(OEM) customers, distributors and dealers, and value added resellers (VARs) and
system integrators. The Company has operations in the Americas, Europe and
Pacific Rim regions.
In August 1994, Adobe acquired Aldus Corporation ("Aldus"), a developer of
software applications for the professional publishing, graphics and prepress
markets; interactive publishing; and the general consumer market through a
pooling of interests. Accordingly, the Company's financial statements have been
restated, for all periods prior to the merger, to include the results of
operations, financial position and cash flows of Aldus.
FISCAL YEAR
The Company's fiscal year is a 52-/53- week year ending on the last Friday of
November.
BASIS OF CONSOLIDATION
The accompanying consolidated financial statements include those of Adobe and
its wholly owned subsidiaries, after elimination of all significant intercompany
accounts and transactions.
68
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(CONTINUED)
NOTE 1.
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
Cash equivalents consist of instruments with maturities of three months or less
at the time of purchase.
In 1994, the Company adopted Statement of Financial Accounting Standards (SFAS)
No. 115, "Accounting for Certain Investments in Debt and Equity Securities." In
accordance with SFAS No. 115, prior period financial statements have not been
restated to reflect the change in accounting principle. The cumulative effect of
adopting SFAS No. 115 was not material to the Company's financial position and
results of operations. Certain cash equivalents and all of the Company's short-
term and noncurrent investments, consisting principally of United States
government and government agency securities, municipal bonds, commercial paper,
auction rate preferred stocks, and asset-backed securities, are classified as
available-for-sale under the provisions of SFAS No. 115. The securities are
carried at fair value, with the unrealized gains and losses, net of taxes,
reported as a separate component of shareholders' equity.
The amortized cost of available-for-sale debt securities are adjusted for
amortization of premiums and accretion of discounts to maturity. Such
amortization is included in investment income. Realized gains and losses, and
declines in value judged to be other than temporary on available-for-sale
securities are included in investment income. The cost of securities sold is
based on the specific identification method. Interest and dividends on
securities classified as available-for-sale are included in interest, investment
and other income.
The Company owns a minority interest in certain technology companies and a
majority interest in a limited partnership, established to invest in technology
companies, and accounts for such investments under the cost method.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities of certain foreign subsidiaries whose functional currency
is the local currency are translated from their respective functional currencies
to United States dollars at year-end exchange rates. Income and expense items
are translated at the average rates of exchange prevailing during the year. The
adjustment resulting from translating the financial statements of such foreign
subsidiaries is reflected as a separate component of shareholders' equity.
Certain other transaction gains or losses, which have not been material, are
reported in results of operations.
69
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(CONTINUED)
NOTE 1.
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out basis) or
market (net realizable value).
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation of a building in Edinburgh, Scotland is calculated
using the straight-line method over 35 years. Depreciation of equipment, and
furniture and fixtures, is calculated using the straight-line method over the
estimated useful lives of the respective assets, generally three to seven years.
Leasehold improvements are amortized over the lesser of the lease term or the
estimated useful lives of the related assets, generally five to nine years.
OTHER ASSETS
Acquired technology, goodwill and licensing agreements are stated at cost less
accumulated amortization. Amortization is provided on the straight-line method
over the estimated useful lives of the respective assets, generally three years
for technology, five to ten years for goodwill, and three to six years for
licensing agreements. The Company periodically reviews the net realizable value
of its intangible assets and adjusts the carrying amount accordingly.
Research and development costs are charged to expense when incurred. Costs
incurred in the research and development of new software products and
enhancements to existing software products are also expensed as incurred until
the technological feasibility of the product has been established. After
technological feasibility has been established, any additional costs are
capitalized in accordance with SFAS No. 86, "Accounting for the Costs of
Computer Software to Be Sold, Leased, or Otherwise Marketed," and are included
in other assets on the accompanying consolidated balance sheets. Such costs are
amortized using the greater of the ratio of current product revenue to the total
current and anticipated product revenue or the straight-line method of the
software's estimated economic life, generally 9 to 24 months.
70
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(CONTINUED)
NOTE 1.
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
OTHER ASSETS (CONTINUED)
Typeface production costs comprise direct and indirect costs associated with the
production of typefaces to be used with the PostScript interpreter, or to be
distributed in shrink-wrapped packages to end users through the retail channel
or directly from the Company. Amortization is provided on the straight-line
method over the estimated useful lives of the respective assets, which is
generally three years.
REVENUE RECOGNITION
Licensing revenue is recognized when the Company's OEM customers ship their
products incorporating Adobe's software to their end user customers. The Company
also enters into contracts with OEMs to provide research and development to
adapt the Company's software products to the OEMs' hardware products. Revenue on
such contracts is recognized based on the percentage-of-completion method and is
included in licensing revenue. Deferred revenue comprises payments received in
advance of revenue recognized on the aforementioned contracts. Revenue relating
to OEM licenses stipulating fixed future payment streams in excess of 12 months
is recognized as income on a straight-line basis over the term of the licenses.
Application products revenue is recognized upon shipment. Revenue from
distributors is subject to agreements allowing limited rights of return and
price protection. The Company provides reserves for estimated future returns,
exchanges and price protection. The costs associated with other obligations,
consisting principally of the customer's right to use the Company's technical
hotline, have been immaterial during all periods presented.
DIRECT COSTS
Direct costs include royalties, amortization of typeface production costs,
amortization of acquired technologies, and direct product, packaging and
shipping costs.
71
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(CONTINUED)
NOTE 1.
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
The Company accounts for its income taxes under SFAS No. 109, "Accounting for
Income Taxes." Under the asset and liability method of SFAS No. 109, deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities measured using enacted tax rates expected to
apply to taxable income in the years in which the temporary differences are
expected to be recovered or settled. Under SFAS No. 109, the effect on deferred
tax assets and liabilities due to a change in tax rates is recognized in income
in the period that includes the enactment date.
The Company does not provide deferred income taxes for unremitted earnings of
foreign subsidiaries, as it is management's intent to reinvest these earnings
indefinitely.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentrations of
credit risk are primarily cash, cash equivalents, short-term investments and
accounts receivable. The Company's investment portfolio consists of investment-
grade securities diversified among security types, industries and issuers. The
Company's investments are managed by recognized financial institutions that
follow the Company's investment policy. The Company's policy limits the amount
of credit exposure in any one issue and believes no significant concentration of
credit risk exists with respect to these investments.
Credit risk in receivables is limited to OEMs, and to dealers and distributors
of hardware and software products to the retail market. The Company adopts
credit policies and standards to keep pace with the evolving software industry.
Management believes that any risk of accounting loss is significantly reduced
due to the diversity of its products, end users and geographic sales areas. The
Company performs on-going credit evaluations of its customers' financial
condition and requires letters of credit or other guarantees, whenever deemed
necessary.
NET INCOME PER SHARE
Net income per share is based upon weighted average common and dilutive
equivalent shares outstanding using the treasury stock method. Dilutive common
equivalent shares include stock options and restricted stock. Fully diluted
earnings per share for 1994, 1993 and 1992 were not materially different from
primary earnings per share.
72
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(CONTINUED)
NOTE 1.
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECLASSIFICATIONS
Certain reclassifications were made to the 1993 and 1992 consolidated financial
statements to conform to the 1994 presentation.
73
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(CONTINUED)
NOTE 2.
MERGER WITH ALDUS CORPORATION
On August 31, 1994, the Company issued approximately 14.2 million shares of its
common stock in exchange for all of the common stock of Aldus. This business
combination has been accounted for as a pooling of interests, and accordingly,
the consolidated financial statements for periods prior to the combination
have been restated to include the results of operations, financial position and
cash flows of Aldus.
The results of operations for the separate enterprises and the combined amounts
presented in the accompanying consolidated financial statements are
summarized below.
Nine Years Ended
Months Ended -------------------------
August 26 November 26 November 27
1994 1993 1992
------------ ------------ ------------
Revenue:
Adobe Systems Incorporated $ 260,112 $ 313,457 $ 265,931
Aldus Corporation 172,210 206,780 174,132
------------ ------------ ------------
Combined $ 432,322 $ 520,237 $ 440,063
------------ ------------ ------------
------------ ------------ ------------
Net Income:
Adobe Systems Incorporated $ 49,329 $ 57,030 $ 43,610
Aldus Corporation 5,131 9,515 6,779
------------ ------------ ------------
Combined $ 54,460 $ 66,545 $ 50,389
------------ ------------ ------------
------------ ------------ ------------
Prior to the combination, Aldus' fiscal year ended on December 31. In recording
the business combination, Aldus' financial statements for the 12 months ended
November 25, 1994 were combined with the Company's financial statements for the
same period. Aldus' financial statements for the years ended December 31, 1993
and 1992 were combined with the Company's financial statements for the years
ended November 26, 1993 and November 27, 1992, respectively. Revenue and net
income of Aldus for the month ended December 31, 1993 were $26.1 million and
$4.4 million, respectively. Net income, the foreign currency translation
adjustment, the issuance of common stock, and the net increase in cash and cash
equivalents were adjusted to eliminate the effect of including Aldus' results of
operations, financial position and cash flows for the month ended December 31,
1993 in the years ended November 25, 1994 and November 26, 1993.
74
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(CONTINUED)
NOTE 2.
MERGER WITH ALDUS CORPORATION (CONTINUED)
There were no significant transactions between the Company and Aldus prior to
the combination, which required elimination, and no adjustments were required to
conform accounting policies. However, certain reclassifications were made to the
1993 and 1992 financial statements to conform to the 1994 presentation.
NOTE 3.
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
As discussed in "Note 1 -- Significant Accounting Policies," in 1994 the Company
adopted the provisions of SFAS No. 115.
Certain cash equivalents and all investments have been classified as
available-for-sale securities, and as of November 25, 1994 consisted of the
following:
Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
------------ ------------ ----------- ------------
Tax-exempt
commercial paper
and agency discount
notes $ 152,326 $ 4 $ (4) $ 152,326
United States
government
treasury notes 30,647 -- (629) 30,018
State and municipal
bonds and notes 92,931 -- (927) 92,004
Corporate notes 511 -- (6) 505
Auction-rate securities 80,865 -- -- 80,865
Asset-backed
securities 7,199 -- (322) 6,877
------------ ------------ ----------- ------------
$ 364,479 $ 4 $ (1,888) $ 362,595
------------ ------------ ----------- ------------
------------ ------------ ----------- ------------
Unrealized losses are reported as a separate component of shareholders' equity
net of taxes of $0.8 million. Net realized gains for the year ended November 25,
1994 of $0.2 million are included in interest, investment and other income.
75
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(CONTINUED)
NOTE 3.
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS (CONTINUED)
The Company's investments are classified as follows:
November 25
1994
------------
Cash equivalents $ 152,326
Short-term investments 210,269
------------
$ 362,595
------------
------------
The cost and estimated fair value of available-for-sale securities as of
November 25, 1994, by contractual maturity, consisted of the following:
Estimated
Cost Fair Value
------------ ------------
Due in one year or less $ 229,435 $ 228,725
Due in one to three years 46,981 46,128
Auction-rate securities 80,865 80,865
------------ ------------
357,281 355,718
Asset-backed securities 7,199 6,877
------------ ------------
$ 364,480 $ 362,595
------------ ------------
------------ ------------
Included in auction-rate securities are Select Auction Variable Rate Securities
(SAVRS) whose stated maturities exceed ten years, however, the Company had
the option of adjusting the respective interest rates or liquidating these
investments at auction on stated auction dates every 35 days.
76
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(CONTINUED)
NOTE 4.
RECEIVABLES
Receivables consisted of the following:
November 25 November 26
1994 1993
------------ ------------
Trade receivables $ 69,628 $ 58,555
Royalty receivables 26,800 22,532
Interest and other receivables 3,410 6,098
------------ ------------
99,838 87,185
Less allowance for doubtful accounts 3,253 2,321
------------ ------------
$ 96,585 $ 84,864
------------ ------------
------------ ------------
NOTE 5.
PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
November 25 November 26
1994 1993
------------ ------------
Land $ 782 $ 740
Building 4,615 4,370
Equipment 88,285 82,079
Furniture and fixtures 15,487 29,522
Leasehold improvements 4,146 3,822
------------ ------------
113,315 120,533
Less accumulated depreciation and amortization 74,211 71,398
------------ ------------
$ 39,104 $ 49,135
------------ ------------
------------ ------------
77
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(CONTINUED)
NOTE 6.
OTHER ASSETS
Other assets consisted of the following:
November 25 November 26
1994 1993
------------ ------------
Licensing agreements $ 15,565 $ 16,057
Goodwill 22,359 21,806
Software development costs 27,199 35,427
Typeface production costs -- 4,841
Miscellaneous other assets 16,123 7,437
------------ ------------
81,246 85,568
Less accumulated amortization 35,685 32,444
------------ ------------
$ 45,561 $ 53,124
------------ ------------
------------ ------------
The following significant transactions and activities are included in other
assets:
ACQUISITIONS AND GOODWILL
During 1994, the Company acquired LaserTools Corporation and Compumation,
Incorporated for an aggregate purchase price of $17.0 million. Approximately
$15.5 million was allocated to in-process research and development, and was
expensed at the time of these acquisitions. The Company plans to integrate the
acquired technologies into future products. In addition, Image Club Graphics,
Incorporated ("Image Club"), a mail order catalog marketer, was acquired for an
aggregate purchase price of $3.4 million in cash, which was primarily allocated
to goodwill. Also during 1994, the Company acquired the remaining 20 percent
interest of Aldus Kabushiki Kaisha ("Aldus K.K."), a Tokyo-based company, from
Something Good, Inc., a Japanese software company for an aggregate purchase
price of $2.0 million, which was primarily allocated to goodwill. Aldus K.K.
develops and markets Japanese-language versions of the Company's products.
Operating results of Aldus K.K. have been included in the consolidated
statements from the date of acquisition.
During 1993, the Company acquired AH Software, Inc. (doing business as After
Hours Software) and The Company of Science & Art, for an aggregate purchase
price of $4.6 million in cash and $2.5 million in restricted stock. Of the
purchase price, $4.3 million was allocated to in-process research and
development, and was expensed at the time of these acquisitions.
78
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(CONTINUED)
NOTE 6.
OTHER ASSETS (CONTINUED)
During 1992, the Company acquired OCR Systems Incorporated, Nonlinear
Technologies, Incorporated, and 80 percent of Aldus K.K. for an aggregate
purchase price of $13.8 million, of which $6.3 million was allocated to
in-process research and development, and was expensed at the time of these
acquisitions.
SOFTWARE DEVELOPMENT COSTS
Unamortized software development costs were $9.1 million and $17.1 million as of
November 25, 1994 and November 26, 1993, respectively. Amortization of
software development costs was $8.7 million, $10.2 million and $10.1 million for
the years ended November 25, 1994, November 26, 1993, and November 27, 1992,
respectively.
TYPEFACE PRODUCTION COSTS
Amortization of typeface production costs charged to direct costs was $4.8
million, $4.6 million and $4.1 million for the years ended November 25, 1994,
November 26, 1993, and November 27, 1992, respectively.
MISCELLANEOUS OTHER ASSETS
Included in miscellaneous other assets are investments in a venture capital
limited partnership, minority interests held in other technology companies and
other intangible assets.
During 1991, the Company invested $6.0 million in a real estate partnership to
acquire land and develop office space for its own use. During 1992, the
Company chose to abandon its efforts to pursue the development of land and
buildings under this partnership. The Company entered into an agreement with the
general partner that dissolved the partnership without recourse to the Company.
Accordingly, the investment was written off in 1992.
79
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(CONTINUED)
NOTE 7.
ACCRUED EXPENSES
Accrued expenses consisted of the following:
November 25 November 26
1994 1993
------------ ------------
Royalties $ 10,824 $ 10,388
Accrued compensation and benefits 17,039 17,005
Sales and marketing allowances 19,445 12,466
Miscellaneous accrued expenses 31,692 19,255
------------ ------------
$ 79,000 $ 59,114
------------ ------------
------------ ------------
80
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(CONTINUED)
NOTE 8.
ACCRUED RESTRUCTURING COSTS
On August 31, 1994, the Company merged with Aldus, described in "Note 2 --
Merger with Aldus Corporation," and initiated a plan to combine the operations
of the two companies. On this date, the Company recorded a $72.2 million charge
to operating expenses related to the merger transaction and restructuring costs.
Merger transaction costs consist principally of transaction fees for investment
bankers, attorneys, accountants, financial printing and other related
charges. Restructuring costs include the elimination of redundant information
systems and equipment, severance and outplacement of terminated employees, the
write-off of certain assets related to product lines to be divested or
eliminated, and cancellation of certain contractual agreements.
The merger transaction and restructuring costs are summarized below:
Provision Period from Acquisition
Recorded at to November 25, 1994 Accrued as of
Acquisition Cash November 25
Date Write-offs Payments 1994
------------ ------------ ------------ ------------
Merger transaction
costs $ 14,618 $ -- $ 8,755 $ 5,863
Restructuring costs:
Severance and
outplacement 20,784 -- 9,236 11,548
Redundant
information
systems and
equipment 10,778 10,778 -- --
Assets associated
with duplicate
product lines 14,957 14,957 -- --
Cancellation of
facility leases and
other contracts 11,046 -- -- 11,046
------------ ------------ ------------ ------------
$ 72,183 $ 25,735 $ 17,991 $ 28,457
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
81
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(CONTINUED)
NOTE 8.
ACCRUED RESTRUCTURING COSTS (CONTINUED)
The nature, timing and extent of restructuring costs follows:
SEVERANCE AND OUTPLACEMENT
As a result of the merger, certain technical support, customer service,
distribution and administrative functions were combined and reduced.
Restructuring included severance and outplacement charges related to
approximately 500 terminated employees. Affected employees had received
notification of their termination by September 9, 1994, and final assignments
are expected to be completed during the first quarter of 1995.
REDUNDANT INFORMATION SYSTEMS AND EQUIPMENT
To facilitate the operations of the Company, the combined organization migrated
to a common management information system, which resulted in the write-off of
the book value of the abandoned systems. The sale or disposal of duplicate
information systems and equipment was completed in the fourth quarter of 1994.
ASSETS ASSOCIATED WITH DUPLICATE PRODUCT LINES
As a condition of the merger, the Company will no longer (after January 1995)
sell and distribute FreeHand, the illustration program previously sold and
distributed by Aldus. In addition, PhotoStyler, an image and video editing
software tool, was discontinued in the fourth quarter of 1994, as the product
competed with certain existing products of the Company. The respective
inventories and capitalized software development costs and technologies of these
duplicate product lines were written off in the fourth quarter of 1994.
CANCELLATION OF FACILITY LEASES AND OTHER CONTRACTS
The Company plans to consolidate duplicate offices in Europe, Japan, Canada and
the United States. Lease and third-party contract termination payments,
resulting from the planned closure of these facilities, are expected to continue
through the lease term or negotiated early termination date, if applicable.
82
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(CONTINUED)
NOTE 9.
INCOME TAXES
Income before income taxes includes net income (loss) from foreign operations of
approximately $(10.5) million, $13.5 million and $3.5 million for the years
ended November 25, 1994, November 26, 1993, and November 27, 1992, respectively.
The provision for income taxes consisted of the following:
Years Ended
---------------------------------------
November 25 November 26 November 27
1994 1993 1992
------------ ------------ ------------
Current:
United States federal $ 21,776 $ 14,400 $ 18,667
Foreign 7,579 8,714 7,248
State and local 7,120 6,445 6,138
------------ ------------ ------------
Total current 36,475 29,559 32,053
------------ ------------ ------------
Deferred:
United States federal (11,525) (1,926) (7,954)
Foreign (1,785) 964 18
State and local (1,895) (216) (1,603)
------------ ------------ ------------
Total deferred (15,205) (1,178) (9,539)
------------ ------------ ------------
Charge in lieu of taxes
attributable
to employee stock plans 12,418 10,134 6,545
------------ ------------ ------------
$ 33,688 $ 38,515 $ 29,059
------------ ------------ ------------
------------ ------------ ------------
83
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(CONTINUED)
NOTE 9.
INCOME TAXES (CONTINUED)
Total income tax expense differs from the expected tax expense (computed by
multiplying the United States federal statutory rate of approximately 35
percent for 1994 and 1993, and 34 percent for 1992, to income before income
taxes) as a result of the following:
Years Ended
------------------------------------------------
November 25 November 26 November 27
1994 1993 1992
------------ ------------ ------------
Computed "expected" tax expense $ 13,999 $ 36,804 $ 27,012
State tax expense, net of federal benefit 3,396 5,154 3,826
Nondeductible merger costs 5,209 -- --
Nondeductible write-off of acquired
in-process research and development 7,216 489 245
Tax credits (1,755) (3,433) (3,344)
Foreign losses, not benefited 3,550 676 462
Foreign tax rate differential 2,018 -- --
Other, net 55 (1,175) 858
------------ ------------ ------------
$ 33,688 $ 38,515 $ 29,059
------------ ------------ ------------
------------ ------------ ------------
84
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(CONTINUED)
NOTE 9.
INCOME TAXES (CONTINUED)
The tax effects of the temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities as of 1994 and
1993 are presented below:
November 25 November 26
1994 1993
------------ ------------
Deferred tax assets:
Acquired technology $ 3,306 $ 1,428
Reserves and deferred revenue 17,515 10,599
Depreciation 2,438 1,982
Foreign operating loss carryforwards 5,130 2,678
Tax credits and other carryforwards 4,088 3,777
Other 1,285 3,657
------------ ------------
Total gross deferred tax assets 33,762 24,121
Deferred tax asset valuation allowance (5,130) (2,678)
------------ ------------
Total deferred tax assets 28,632 21,443
------------ ------------
Deferred tax liabilities:
Basis difference of acquired assets (694) (35)
Capitalized costs (1,297) (7,270)
Other (204) (1,006)
------------ ------------
Total deferred tax liabilities (2,195) (8,311)
------------ ------------
Net deferred tax assets $ 26,437 $ 13,132
------------ ------------
------------ ------------
As of November 25, 1994, the Company had United States tax credit carryforwards
of approximately $4 million, which expire in years 1997 through 2008. The
carryforwards are attributable to the premerger years of Aldus and are subject
to certain limitations on usage. The Company also has foreign operating loss
carryovers in various jurisdictions of approximately $13.5 million with various
expiration dates. For financial reporting purposes, a valuation allowance has
been established to fully offset the deferred tax assets related to foreign
operating losses due to uncertainties in utilizing these losses. The increase in
the valuation allowance in 1994 resulted from foreign losses for which no tax
benefit has been recognized.
85
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(CONTINUED)
NOTE 10.
EMPLOYEE BENEFIT PLANS
STOCK OPTION PLAN
As of November 25, 1994, the Company had reserved 20,000,000 shares of common
stock for issuance under its Stock Option Plan.
Each option assumed by Adobe under the Merger Agreement will continue to have,
and be subject to, the same terms and conditions set forth in the relevant Stock
Option Plan. The Aldus plan provided for the granting of stock options to
employees and officers at the fair market value at the grant date. Options vest
at 20 percent after the first year and ratably each month for the next four
years.
The Adobe plan provides for the granting of stock options to employees and
officers at the fair market value of the Company's common stock at the grant
date. Options generally vest over three years: 25 percent after the first year,
and the remainder ratably each month for the next two years so that the options
are 50 percent vested after the second year and fully vested after the third
year. All options have a five-, seven-, or ten-year term. Stock option activity
for 1992, 1993 and 1994 is presented on the following page.
86
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(CONTINUED)
NOTE 10.
EMPLOYEE BENEFIT PLANS (CONTINUED)
STOCK OPTION PLAN (CONTINUED)
Options Outstanding
Options ------------------------------
Available Number Price
for Grant of Shares per Share
------------ ------------ ------------
Balances as of November 29, 1991 5,093,694 8,396,826 $0.02-49.00
Options granted (4,813,516) 4,813,516 10.25-33.88
Options exercised -- (972,271) 0.02-24.75
Options cancelled 3,117,067 (3,117,067) 0.58-49.00
------------ ------------ ------------
Balances as of November 27, 1992 3,397,245 9,121,004 0.02-47.25
Additional shares reserved 4,500,000 -- --
Options granted (3,278,018) 3,278,018 2.17-33.75
Options exercised -- (1,366,387) 0.02-27.25
Options cancelled 741,861 (741,861) 0.58-37.87
------------ ------------ ------------
Balances as of November 26, 1993 5,361,088 10,290,774 0.06-47.25
Options granted (2,246,430) 2,246,430 17.25-36.38
Options exercised -- (2,331,438) 0.06-33.75
Options cancelled 788,482 (788,482) 0.58-33.75
Adjustment for change in Aldus
Corporation fiscal year-end 142,314 (51,421) --
Aldus options retired (968,713) -- --
------------ ------------ ------------
Balances as of November 25, 1994 3,076,741 9,365,863 $ 0.25-47.25
------------ ------------ ------------
------------ ------------ ------------
Of the options outstanding, 5,570,349 were exercisable as of November 25, 1994.
87
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(CONTINUED)
NOTE 10.
EMPLOYEE BENEFIT PLANS (CONTINUED)
RESTRICTED STOCK OPTION PLAN
The Company's Restricted Stock Option Plan provides for the granting of
nonqualified stock options to nonemployee directors and consultants. Option
grants are limited to 7,500 shares per person in each fiscal year and are
immediately exercisable within a ten-year term. Options generally vest over
three years: 25 percent in each of the first two years and 50 percent in the
third year. Stock option activity for 1992, 1993 and 1994 is as follows:
Options Outstanding
Options ------------------------------
Available Number Price
for Grant of Shares per Share
------------ ------------ ------------
Balances as of November 29, 1991 82,500 95,000 $ 4.13-27.00
Options granted (50,000) 50,000 14.06-21.56
Options exercised -- (5,000) 11.13
------------ ------------ ------------
Balances as of November 27, 1992 32,500 140,000 4.13-27.00
Options granted (40,000) 40,000 23.94
Options exercised -- (5,000) 11.13
Options cancelled 20,000 (20,000) 21.56-27.00
------------ ------------ ------------
Balances as of November 26, 1993 12,500 155,000 4.13-27.00
Additional shares reserved 50,000 -- --
Options granted (45,000) 45,000 21.88-31.75
------------ ------------ ------------
Balances as of November 25, 1994 17,500 200,000 $ 4.13-31.75
------------ ------------ ------------
------------ ------------ ------------
All options outstanding were exercisable as of November 25, 1994 under the
Restricted Stock Option Plan. In addition, 95,375 outstanding options under the
Aldus Restricted Stock Option Plan were assumed by Adobe, of which all shares
are outstanding and exercisable as of November 25, 1994, at prices ranging from
$13.75 to $47.25 per share.
88
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(CONTINUED)
NOTE 10.
EMPLOYEE BENEFIT PLANS (CONTINUED)
PERFORMANCE AND RESTRICTED STOCK PLAN
The Company's Performance and Restricted Stock Plan is an amendment and
restatement of the Restricted Stock Plan. In August 1994, shareholders approved
an amendment to increase the number of shares authorized for issuance from
1,000,000 to 1,500,000. The Performance and Restricted Stock Plan provides for
the granting of restricted stock and/or performance units to officers and key
employees. Shares issued under this plan vest annually over three years but are
considered outstanding at the time of grant, as the shareholders are entitled to
dividends and voting rights. Performance units issued under this plan would
entitle the recipient to receive shares upon completion of the performance
period subject to attaining identified performance goals. As of November 25,
1994, 702,192 shares were outstanding under this plan, of which 101,787 were not
yet vested. As of November 25, 1994, no performance units had been issued.
EMPLOYEE STOCK PURCHASE PLAN
Under the terms of the Company's Employee Stock Purchase Plan, eligible employee
participants may purchase shares of the Company's common stock semiannually at
85 percent of the market price, on either the purchase date or the offering
date, whichever price is lower. In April 1994, shareholders approved an
amendment to increase the number of shares authorized for issuance under the
plan from 2,000,000 to 4,000,000.
PRETAX SAVINGS PLAN
In 1987, the Company adopted an Employee Investment Plan, qualified under
Section 401(k) of the Internal Revenue Code, which is a pretax savings plan
covering substantially all of the Company's United States employees. Under the
plan, eligible employees may contribute up to 18 percent of their pretax salary,
subject to certain limitations. There were 841 employees under the plan in 1994
and 720 employees under the plan in 1993. Commencing in 1992, the Company
matched a portion of employee contributions. Company matching contributions,
which can be terminated at the Company's discretion, were $0.7 million and $0.6
million in 1994 and 1993, respectively. No matching contributions were made to
the plan in 1992.
89
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(CONTINUED)
NOTE 11.
CAPITAL STOCK
SHAREHOLDER RIGHTS PLAN
The Company's Shareholder Rights Plan is intended to protect shareholders from
unfair or coercive takeover practices. In accordance with this plan, the Board
of Directors declared a dividend distribution of one common stock purchase right
on each outstanding share of its common stock held as of July 24, 1990. Each
right entitles the registered holder to purchase from the Company a share of
common stock at $230. The rights become exercisable in the following
circumstances:
* The rights become exercisable ten days after a public announcement by
another entity that it has acquired beneficial ownership of 20 percent
or more of the shares (and that is without the approval of the Board
of Directors) or, if earlier, a public announcement of another
entity's intention to commence a tender offer to acquire beneficial
ownership of 20 percent or more of the shares.
* The rights become exercisable if another entity engages in certain
self-dealing transactions with the Company or becomes the beneficial
owner of 20 percent or more of the shares.
* The rights become exercisable if the Company is acquired by any person
in a merger or business combination transaction, or if 50 percent or
more of the Company's assets or earnings powers are being sold to
another entity.
The rights are redeemable by the Company prior to exercise at $0.01 per right
and expire on July 24, 2000.
PUT WARRANTS
In a series of private placements in 1994 and 1993, the Company sold put
warrants entitling the holder of each warrant to sell one share of common stock
to the Company at a specified price. The Company received $719,000 and $694,000
for the sale of put warrants in 1994 and 1993, respectively.
The Company's $6.9 million potential buyback obligation, as of November 26,
1993, was removed from shareholders' equity and recorded as put warrants. At the
prevailing market prices for the Company's common stock, there was no dilutive
effect on earnings per share in 1993. No put warrants were outstanding as of
November 25, 1994.
90
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(CONTINUED)
NOTE 11.
CAPITAL STOCK (CONTINUED)
STOCK SPLIT
On July 9, 1993, the Board of Directors of the Company approved a two-for-one
split of the Company's common stock, payable in the form of a stock dividend.
The shares were distributed on August 10, 1993, to shareholders of record on
July 27, 1993. The share and per share amounts in the consolidated financial
statements and notes thereto have been retroactively adjusted to reflect the
effects of this split for all periods presented.
NOTE 12.
COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
The Company has operating leases for its corporate headquarters, field sales
offices and certain office equipment that expire at various dates through 2001.
Rent expense for these leases aggregated $14.8 million, $17.0 million and $13.1
million during 1994, 1993 and 1992, respectively. As of November 25, 1994,
future minimum lease payments under noncancellable operating leases are as
follows: 1995 -- $15.0 million; 1996 -- $11.5 million; 1997 -- $3.7 million;
1998 -- $1.3 million; 1999 -- $0.9 million; and $4.8 million thereafter.
REAL ESTATE DEVELOPMENT AGREEMENT
In 1994, the Company entered into a real estate development agreement for the
construction of an office facility and in 1996 will enter into an operating
lease agreement for this facility. The Company will have the option to purchase
the facility at the end of the lease term. In the event the Company chooses not
to exercise this option, the Company is obligated to arrange the sale of the
facility to an unrelated party and is required to pay the lessor any difference
between the net sales proceeds and the lessor's net investment in the facility,
in an amount not to exceed that which would preclude classification of the lease
as an operating lease, which is approximately $52.0 million. The Company also is
required, periodically during the construction period, to deposit funds with the
lessor to secure the performance of its obligations under the lease, and as of
November 25, 1994, the Company had deposited approximately $2.3 million in
securities.
91
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(CONTINUED)
NOTE 12.
COMMITMENTS AND CONTINGENCIES (CONTINUED)
ROYALTIES
The Company has certain royalty commitments associated with the shipment and
licensing of certain products. While royalty expense is generally based on a
dollar amount per unit shipped, ranging from $0.25 to $63.00, certain royalties
are based on a percentage, ranging from 0.2 percent to 20 percent, of the
underlying revenue. Royalty expense was approximately $34.8 million, $32.4
million and $32.5 million for the years ended November 25, 1994, November 26,
1993, and November 27, 1992, respectively.
LEGAL ACTIONS
The Company is engaged in certain legal actions arising in the ordinary course
of business. The Company believes it has adequate legal defenses and believes
that the ultimate outcome of these actions will not have a material effect on
the Company's financial position and results of operations.
NOTE 13.
TRANSACTIONS WITH AFFILIATES
The Company holds a 10 percent equity interest in McQueen Holdings Limited
("McQueen") and accounts for the investment at cost. During 1994, the Company
entered into various agreements with McQueen, whereby the Company has contracted
with McQueen to perform printing, assembly and warehousing services, and has
agreed to guarantee obligations under operating leases for certain facilities
utilized by McQueen and to guarantee a certain level of business between the
Company and McQueen. The remaining aggregate contingent liability for nonpayment
of rent, through September 1999, for facilities occupied by McQueen was
approximately $2.3 million, and minimum monthly payments Adobe will make to
McQueen for certain services, over the next three years, are approximately $15.8
million. Purchases from McQueen amounted to $13.0 million, $12.6 million and
$11.0 million during 1994, 1993 and 1992, respectively.
92
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(CONTINUED)
NOTE 14.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's cash equivalents and short-term investments are carried at fair
value, based on quoted market prices for these or similar investments. For other
investments, included in miscellaneous other assets, the estimated fair value is
determined using available market information or other appropriate valuation
methodologies, and the carrying amount of these investments approximates fair
value.
Put warrants outstanding as of November 26, 1993 are carried at the maximum
amount required to settle the potential obligations under the terms of the put
warrants. The fair value of the put warrants is not practically determinable,
because it fluctuates based on the Company's stock price and at any point in
time could be less than the carrying amount.
NOTE 15.
INDUSTRY SEGMENT REPORTING AND FOREIGN OPERATIONS
Adobe and its subsidiaries operate in one dominant industry segment. The Company
is engaged principally in the design, development, manufacture and licensing of
computer software. No customer accounted for more than 10 percent of the
Company's total revenue in 1994, 1993 or 1992.
The Americas operations include revenue and results of operations in North
America, South America, Mexico and Latin America, as well as licensing revenue
recognized on a worldwide basis. Licensing revenue is not available on a
geographic basis, because the source of licensing revenue is known only by the
OEMs' headquarters, and not necessarily by the geographic region providing the
revenue stream to the OEMs. Accordingly, all licensing revenue is included in
The Americas. European operations primarily include subsidiaries in the
Netherlands, the United Kingdom, France, Germany and Sweden, while Pacific Rim
operations include subsidiaries in Japan and Australia. Transfers between
subsidiaries are accounted for at amounts that are generally above cost and
consistent with rules and regulations of governing tax authorities. Such
transfers are eliminated in the consolidated financial statements. Identifiable
assets are those assets that can be directly associated with a particular
geographic area and subsidiary. Geographic information for each of the years in
the three-year period ended November 25, 1994 is presented on the following
page.
93
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(CONTINUED)
NOTE 15.
INDUSTRY SEGMENT REPORTING AND FOREIGN OPERATIONS (CONTINUED)
YEARS ENDED
--------------------------------------
November 25 November 26 November 27
1994 1993 1992
------------ ---------- ------------
Revenue:
The Americas $ 430,770 $ 386,156 $ 350,486
Europe 108,903 107,582 92,147
Pacific Rim 72,036 51,495 30,557
Eliminations (13,937) (24,996) (33,127)
------------ ---------- ------------
$ 597,772 $ 520,237 $ 440,063
------------ ---------- ------------
------------ ---------- ------------
Operating income:
The Americas $ (1,847) $ 64,719 $ 70,345
Europe 53 22,361 16,539
Pacific Rim 32,745 21,645 11,010
Eliminations 34 (16,494) (23,428)
------------ ---------- ------------
$ 30,985 $ 92,231 $ 74,466
------------ ---------- ------------
------------ ---------- ------------
Identifiable assets:
The Americas $ 591,625 $ 608,636 $ 417,800
Europe 53,944 46,205 51,885
Pacific Rim 18,633 9,885 8,067
Eliminations (38,699) (134,886) (40,129)
------------ ---------- ------------
$ 625,503 $ 529,840 $ 437,623
------------ ---------- ------------
------------ ---------- ------------
94
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Board of Directors and Shareholders
Adobe Systems Incorporated
We have audited the balance sheet of Aldus Corporation as of December 31, 1993,
and the related consolidated statements of income, shareholders' equity, and
cash flows for each of the two years in the period ended December 31, 1993 (not
presented separately herein). These financial statements are the responsibility
of Aldus' management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statments referred to above present fairly, in all
material respects, the consolidated financial position of Aldus Corporation at
December 31, 1993, and the consolidated results of its operations and its cash
flows for each of the two years in the period ended December 31, 1993, in
conformity with generally accepted accounting principles.
Ernst & Young LLP
Seattle, Washington
January 28, 1994
95
FINANCIAL STATEMENT SCHEDULE
As required under Item 8. Financial Statements and Supplementary Data, the
financial statement schedule of the Company is provided in this separate
section. The financial statement schedule included in this section is as
follows:
Sequentially
Schedule Numbered
Number Financial Statement Schedule Description Page
- - ------------- -------------------------------------------- ------------
Schedule II Valuation and Qualifying Accounts 97
96
ADOBE SYSTEMS INCORPORATED
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
VALUATION AND QUALIFYING ACCOUNTS WHICH ARE DEDUCTED IN THE
BALANCE SHEET FROM THE ASSETS TO WHICH THEY APPLY
Additions
---------------------
Balance at Charged to Charged to Balance at
Beginning Operating Other End
of Period Expenses Accounts Deductions of Period
---------- ---------- ---------- ---------- ------------
Allowance for doubtful
accounts:
Year Ended:
November 25, 1994 $ 2,321 $ 1,518 $ -- $ 586 $ 3,253
November 26, 1993 1,916 1,842 -- 1,437 2,321
November 27, 1992 1,963 862 -- 909 1,916
Deductions related to the allowance for doubtful accounts, represent amounts
written off against the allowance.
SEE ACCOMPANYING INDEPENDENT AUDITORS' REPORT.
97
EXHIBITS
As required under Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K, the exhibits filed as part of this report are provided in this
separate section. The exhibits included in this section are as follows:
Sequentially
Exhibit Numbered
Number Exhibit Description Page
- - ----------- -------------------------------------------------- ------------
3.2.6 Restated Bylaws 99
10.32 Sublease of the Land and Lease of the Improvements 126
By and Between Sumitomo Bank Leasing and Finance
Inc. and Adobe Systems Incorporated
11 Computation of Earnings per Common Share 193
21 Subsidiaries of the Registrant 194
23 Consent of Independent Auditors 195
23.1 Consent of Ernst & Young LLP, Independent Auditors 196
27 Financial Data Schedule 197
98